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Staying Financially Fit | Three Things to Consider When Buying a Vacation Property

| NOV 29, 2019

It’s a dream for many of us. The cabin up north, or maybe it’s a vacation home down in Florida or Arizona. A place to make memories with the family or enjoy our retirement years in peace and tranquility. But then reality sets in. How much can I really afford? When is the right time to buy? Should I go it alone?

Purchasing a vacation property requires considerations that are distinct from buying a primary residence. The following are three key things to think about well in advance of signing on the bottom line.

More than just an extra mortgage payment
When contemplating the purchase of a second home, many of us begin by zeroing in on how much we can afford. That is, we fixate on the asking price and what the monthly mortgage payments would be. However, consider all of the other costs that can come with a vacation property: property taxes, insurance, snow removal, lawn care, household maintenance, travel expenses to the property, furnishings for the home, etc. Essentially, the purchase of a vacation home can mean doubling up (if not more) on household expenses.

But there is a bright side. History shows us that over time, real estate often appreciates in value. Look at a second home as less of an expense, and more of a long-term investment. Also, mortgage interest remains tax deductible for second homes, as long as the primary purpose is not to generate income, such as being rented out on Airbnb every weekend. However, the Tax Cuts and Jobs Act of 2017 reduced the maximum amount of mortgage debt that is eligible for interest tax deductions to $750,000, and that is inclusive of both a primary residence and a second home. For any mortgage debt above that amount, the interest paid is not tax deductible.

When is the right time?
People purchase vacation properties for very different reasons. For some, it’s a place to frolic with the kids. For others, it’s a refuge from the pressures of work and society. For still others, it’s a place to relax and enjoy their retirement years. Before purchasing a vacation property, think long and hard about the purpose for it and who you want to enjoy it with you. That will inform your decision on when to potentially take the plunge.

However, be careful not to fall into the trap of waiting too long. If your dream is of a lake cabin to take the kids to every weekend, don’t wait until they are well into high school. By that time, their interest and the opportunity may have passed.

Also, consider the future when making a decision. Do you foresee future generations enjoying the property? If so, you may want to buy a bigger parcel of land, or a home you can add on to later.

The more the merrier?
Often vacation properties are very much a family affair. They are a place to gather with extended family members and create shared memories. So why not purchase jointly with siblings and cousins and make it more affordable for everyone involved? Many families do, but it’s best to go in with clear agreement on roles and responsibilities. Will you split the cost of the purchase evenly? How about the ongoing expenses of the property? Who gets to use the property and when? Families have the greatest success -  and can avoid an ugly falling out - when those topics are discussed and documented early on.

Also consider what happens with the property once the initial generation is gone. Does it pass down to all heirs evenly? What if some of them don’t use it, can’t afford to maintain it, or want to sell it? Placing a vacation property into a trust can definitively answer those types of questions and prevent potential squabbling among future generations.

When thought through carefully and planned for well in advance, the purchase of a vacation property can indeed be a dream come true. Want to learn mor

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