Have you ever had the experience of going on a summer vacation and you loved the place so much that you considered purchasing a house in that region? Of course when you worked hard all your life you want to be able to have the bragging rights of owning a “vacation house”, don’t you?
It’s hard to resist the insistence of your spouse or child when you guys loved the area and the houses there. It’s not enough to just go to a hotel or rent a place. You need to be able to say, “this is home”. Especially when your family is in such an elated state after hiking with that grand view of the sunset or after surfing the waves of the ocean.
Well, hold your horses. We all want to be happy and indulge in those purchases that put a smile on everyone’s face. But with every decision there are both pros and cons. You need to have a long-term view when deciding whether you should purchase a vacation home or not. Taking a step back, and really thinking this through can mean a big difference in your bank account and your peace of mind.
There are five factors to consider before purchasing a vacation home:
1. Balance of Emotional and Logical Decision Making
Just like when going to the grocery store, there are things that are essential to buy and things that can be considered as unnecessary expenses. When cravings hit, that’s when you will pick up those chips and other junk food that is not good for your health.
The same goes when purchasing a summer vacation home. You might have just been high on life during your vacation and that emotional trigger is what’s driving you to consider purchasing a house. But when logic sets in, that decision may not be the most financially sound.
Catch yourself when you’re on that emotional high. Really think if that decision is the best in terms of wealth management. Consider how you can afford it and whether you can turn that vacation house into an income-producing asset as well.
2. Maintenance and Hidden Costs
When it comes to costs, there is the purchase price of course, which is obvious. However, the true costs that may dig into your precious savings and cause negative cash flows are the maintenance costs of the house.
These maintenance costs may include:
- Property management fees
- Home insurance
- Property taxes
You and your family wouldn’t be there the whole year, so these costs may just be a burden to you and a headache. We recommend consulting with a wealth management firm such as Destiny Capital. We can help you analyze if the investment in the vacation home can be turned into not just into an item in the expense column, but a hard-working asset as well. Not only might it be a vacation home, but a cash-generating machine.
3. Market Value
Some real estate agents are clever and know when a client has a big urge to purchase a property, especially when it is a vacation home. They know how to entice your appetite and charge more because your decision may be emotional.
In purchasing any property (not just a vacation home), we ideally want to buy it at less than market value. You should do your research on this and talk to people in the neighborhood, and checkout other similar listings to familiarize yourself with the market. How much are houses selling for in that area? Destiny Capital can assist you with valuing a real estate investment that you are interested in. A simple conversation with one of our advisors may save you time and money.
Now, when you are negotiating the purchase price of the property, you should have a benchmark of your maximum bid. If you purchase the property for less than market value, then you already have an advantage in terms of capital appreciation. You may be able to sell your property in the future at a higher profit margin.
4. Renting it Out
If you are investing in properties primarily for rental income, then a long-term tenant is ideal. However, when you are purchasing a summer vacation home, most of the year you won’t be living there. Is there a way to be able to rent it out and still be able to use it when you want?
The answer is yes. There are companies like that can help you rent out your property for the short-term, mid-term or long-term. You can basically convert your summer vacation home into a temporary hotel at those times when you’re not there. Of course, these companies charge fees for their services, and you will want to factor those into your decision.
5. Capital Gains Taxes
When you decide to sell your summer vacation home after a few years due to the hot demand and high capital appreciation, the IRS will be taking about 15 - 20% from the capital gains, depending on your tax bracket. There are ways to minimize this and Destiny Capital can guide you through that process.
You may want to consider taking advantage of the 1031 Exchange Rule, which states that you can reinvest the proceeds from your investment into a similar asset to defer capital gains tax.
Another way to minimize the capital gains tax is to own the vacation property for at least five years and live in it for at least two years. The IRS offers a capital gains tax exclusion of $250,000 for single taxpayers and $500,000 for married taxpayers resulting from the sale of their primary residence. If you lived in your summer vacation home for at least two years, you should be able to claim a portion of this tax exclusion. Consulting with a tax professional is recommended before selling an investment property.
Before considering purchasing a summer vacation home, there are a lot of factors to consider. This decision may mean a lot of additional stress or an additional gold mine in your accumulating list of assets.
So be wise in any investment decision you make. It would help if you do more homework regarding wealth management so that you’ll know what investments are right for you. As Robert Kiyosaki, one of the most famous real estate investors, once said:
“Inside of every problem lies an opportunity”
At Destiny Capital, we help you make the right decisions regarding your financial planning. Talk to us to receive your free consultation. Let’s be partners in building your wealth and achieving your financial goals.