Credit Sesame CEO Adrian Nazari was quoted in a U.S. News story regarding investing in a vacation home and what consumers should know beforehand.
4 Things to Know Before Investing in a Vacation Home
by Kaleigh Kulp
Families with disposable income and a penchant for travel may be tempted to purchase a vacation home investment to use personally or to rent to other travelers.
A vacation home could save you money if you use it a lot, especially if hotel and lodging costs are high in a destination you frequent, says Connie Brazier, who has helped vacation homebuyers with loans for 20 years at Quontic Bank in Miami. The potential for value appreciation, rental income and tax benefits can be a nice bonus.
But the costs of owning a vacation home can be higher than a primary home with upkeep and insurance, and buyers could mistakenly buy in a tanking area if they don’t do their research. If the numbers and circumstances work, now may be the time to snatch up a vacation home investment.
“For the most part, vacation rentals have not been immune to the inventory crunch in the residential market,” says Emile L’Eplattenier, a real estate marketing and sales analyst for the website FitSmallBusiness.com. “Worse, real estate investing, particularly fix and flip and rentals, has seen a dramatic resurgence in the last few years. Great deals in the vacation market might become scarcer in the next few years.”
But before you rush to buy in at your dream oasis, consider the following:
You need cash reserves and an accurate cash flow projection. Qualifying for a vacation home mortgage requires disposable cash and a solid knowledge of its rental potential, if you choose to rent it out. If mortgaging the property as an investment, you’ll qualify by using rental income. That interest rate would be higher than a primary home purchase, Brazier says.
Rental income should be calculated to include expenses such as homeowners’ association fees, mortgage payments, vacancy rates, maintenance and capital expenditures in mind, says Brian Davis, a real estate investor and educator with SparkRental.com.
Get several pro forma income estimates from vacation property managers to help you get an accurate picture of potential cash flow. But keep in mind property management fees also tend to be higher among vacation rentals than long-term rentals “because of the extra work involved in rapid turnovers,” he says.
Property taxes can also be up to twice as much without the homestead exemption offered on a primary residence, says Adrian Nazari, CEO of Credit Sesame, a free credit and loan management platform.