1. Financial considerations
Money talks, and when it comes to a major investment decision, it can yell. Here are some of the financial considerations to take into account when deciding between staying in a rental property and buying a place of your own.Upfront costs
Of course, purchasing a home will cost significantly more than simply paying for a week or two in a vacation rental whenever wanderlust strikes. If you won’t be buying the full property in cash, you’ll need to have enough available cash to make a down payment. And if you’ll be financing the home, keep in mind that loans for second homes or vacation properties often require a larger down payment than a mortgage for your primary residence. This is because lenders view these types of purchases as riskier. Conversely, to rent a vacation home for your trip, you’ll just have to make an upfront deposit, which can range from a few hundred dollars to 50% of your total reservation cost. Then, you’ll pay the balance due a few days before you arrive.Ongoing expenses
Once you’ve packed up and headed home from your vacation rental, your expenses are over — well, except for the souvenirs you might grab at the airport. All of the maintenance and upkeep are left to the owner and/or their property management company. But if you decide to buy a second home, you’ll need to be prepared to pay ongoing monthly expenses. This includes your monthly mortgage payment, utilities, property taxes, maintenance and often HOA fees.Unexpected costs
If you own your primary residence, you know that sometimes unexpected expenses pop up. Vacation homes are no exception. You’ll need to have money set aside for an emergency fund, so you’ll be prepared to cover unexpected expenses like roof repairs, water damage and replacing major systems like your heating and air conditioning, hot water heater or major appliances.Investment opportunity
When you rent a home for a vacation, all you get for your money are memories. In fact, your rental dollars end up in the pocket of the property’s owner after the expenses. However, when you own your vacation home, you become the person who captures that rental income. What’s more: When you own your vacation home, you’re investing in an asset that may increase in value over time. Many second home owners even choose to retire in their vacation homes when the time comes. And speaking of long-term plans, if your second home gains value over time, you may be well positioned down the road to take out a home equity loan or home equity line of credit (HELOC) on the property. Simply put, you can tap into the equity without having to sell the home and jeopardize the equity in your primary residence. When you own a vacation home, you can keep it to yourself, enjoy it strictly with family and friends, or you may choose to offer it as a short-term rental. Short-term rental income can offset the cost of the mortgage and expenses like maintenance, utilities and property taxes. You might even be able to generate an investment property profit.Rental income potential
If you’re buying a second home with the goal of generating some rental income to cover some of your expenses, consider the fact that many second home destinations are highly seasonal. For example, if you have a home in a mountain destination like Lake Tahoe, Colorado or Jackson Hole, you’ll probably have no problem getting rental bookings during peak ski season. However, the shoulder seasons of spring and fall may be pretty slow. Similarly, desert homes in locations like Palm Springs have similar challenges, just during a different part of the year. You may have an easy time renting to snowbirds seeking warm weather in the fall and winter, but you may not see much action during the blistering hot summers.Because of these seasonal fluctuations, some second home owners choose to buy in year-round sunny destinations, like Hawaii or Cabo San Lucas. In these destinations, you can still expect some seasonal fluctuations, but they’re less likely to be as extreme.Tax incentives
You won’t see any tax benefits as the renter of a vacation home, but you might get benefits if you take out a mortgage to buy a second home of your own. Just like on your primary residence, you can deduct the interest you pay on second home mortgages up to $750,000 in total (combined between your primary and secondary residences). And, if you rent out your vacation home for more than two weeks each year, you are eligible to deduct expenses related to maintaining the property. Navigating tax write offs for rental properties, second homes and vacation properties can be tricky, so be sure to ask a tax professional for help.
2. Local rules and regulations
If you’re considering buying a second home and using it as a short-term rental for at least part of the year, it’s important to check local rules and regulations before purchasing. As each year passes, more destinations are limiting or fully banning short-term rentals with the aim of preserving the quality of life for year-round residents. Sometimes, these rules only apply to new purchases. Ask your real estate professional to double-check your target destination so you don’t end up buying a house counting on the rental income and instead getting stuck with the full carrying costs. And keep in mind that not all localities allow short-term rentals, so check local ordinances before buying if you plan to rent out the home.3. Time considerations
As the saying goes, time is money, so it’s important to consider how you want to spend yours. Here are a couple of things to keep in mind when deciding if you should buy a vacation home or book a rental property.Research and booking time
Picture this: Your family is ready to take a beach vacation, and you’d prefer to have all the benefits of a vacation home instead of being crammed into a hotel room. Commence online searching! If you’ve ever combed through rental listings, you know it takes time to find a rental property that fits your needs — the ideal location, right number of bedrooms, great amenities and if it fits your budget. Plus, it will need to be available on the dates that fit your schedule. You’ll probably spend hours searching multiple websites, reviewing photos and reading guest reviews.When you own a vacation home, you always know when it’s available and exactly what to expect. You’ll never end up in a situation where the property you’ve rented isn’t as nice as the listing described or the pictures depicted.Upkeep time and effort
With a rental property, your only responsibility is to follow the house rules and treat the property with respect. You often won’t even need to clean up before you leave — you’ll just pay a cleaning deposit to cover that.But when you own a vacation home, you’re responsible for all kinds of upkeep and maintenance, from standard maintenance to one-off repairs. You’ll be on the hook for seasonal maintenance as well, including landscaping and snow removal if your second home is a mountain retreat. If you’re a do-it-yourself type, keep in mind that maintenance can be tricky to complete if your second home is a long distance from your hometown. A long car ride or a flight just to tackle a home maintenance to-do list can be less than ideal. If you don’t have the time or skill set to tackle these tasks on your own, plan to pay for property management services to schedule and complete these tasks.Packing
Packing for vacation can be a giant task, especially if you’re traveling with the whole family. There’s laundry to do, suitcases to fill, sporting equipment to pack and, in the case of staying in a vacation home with a kitchen, groceries to buy. When you own your own place, you can leave many of the essentials there so your retreat is ready for a last-minute getaway. If you rent out your home or share it with other owners, you can keep your personal items in an onsite storage area. Common items to store at your second home include kitchen staples like cooking oils, spices and dry goods; recreational items like bicycles, golf clubs and tennis rackets; and home essentials like laundry detergent, a toolbox and linens.
4. Vacation experience
Whether buying or renting makes sense for you often comes down to what your vacation goals are. Some people crave variety in their vacation experiences. They travel to explore new destinations and have new experiences. Others prefer consistency, a place they know and love where they can relax and connect with loved ones. Consider your vacation criteria and how you like to spend your time when you’re deciding the right path for you.Destinations
If wanderlust is your middle name and you love exploring new places, renting may be your best option. That way, you have the flexibility to go wherever the wind takes you. But if you’ve already found your heaven on earth and know you’ll want to return again and again, buying a vacation home in that destination makes more sense. There can be a good middle ground, though — some second home owners strike a balance between staying put and seeing new places by using home exchange programs (also called house swaps).Guests
Are you the “more the merrier” type? Most rental properties have strict rules about additional guests. So if you’re hoping to share your vacation experience with a large group of family and friends, you’ll have more flexibility if you own your home. That way, your guests can come and go as they please. Some second home owners also enjoy the flexibility of letting their loved ones use their vacation home from time to time.Feeling like a local
When you rent a vacation home in a random destination, you’ll always be a visitor and a tourist. If you want to experience your destination like a true local and have a say in decisions about your property and your community, then ownership is a better choice. As you continue visiting your second home, you’ll start to get to know the area and before you know it, you’ll have a favorite morning coffee shop, favorite hiking trail and a list of the best restaurants for every occasion.Retirement planning
Many people who choose to buy a vacation home do so with their retirement plans in mind. Today’s second home can easily become tomorrow’s full-time residence in a destination you already know and love.
