Five Good Reasons to Own a “Vacation” Home

 

“Home is where the heart is and hence a movable feast.” – Angela Carter

There are at least five good reasons to buy a second home:

1. It can become your future retirement home. Buy it now and have it paid off in today’s cheap dollars. Years from now, when your friends and neighbors are struggling to buy a shack, you’ll have a dream home, completely upgraded, decorated, and paid for.

2. It is a great way to increase your wealth. For most Americans, the house they buy turns out to be their biggest asset when it comes time to assess their wealth. If your main house might someday make you worth, say, $500,000 …why not buy another one and make yourself a millionaire? (This is especially possible if you can have the cost of the second home covered by rentals.)

3. It can be a special gathering place for friends and relatives and provide a second sense of “where I belong” to your children. Second homes that are regularly used for vacations and holidays provide a unique and valuable contribution to the spiritual wealth of any family.

4. Passive real-estate ownership can help diversify your portfolio, increase your overall ROI (especially if you are a conservative investor like me), and provide a comforting level of financial security (something that is obviously needed given today’s market fluctuations).

5. If you buy right and manage it right, a second home can provide you with years and years of additional income.

These are the biggest and most obvious benefits. There are others too. My home in Nicaragua gives me an ongoing sense of relief from the daily pressures of business. If things ever get to be “too much,” I know I will be able to hop on a plane and, in a few short hours, be sipping rum cocktails on my porch, overlooking the Pacific Ocean. This is a psychological reward that benefits me almost every day of my life — even if I never have to “use” it that way.

It is also a place where I can practice my Spanish and go to festivals and horse parades and rodeos and parties that I could never experience in the United States. My home in Nicaragua offers me an entry into a second culture — and gives me a chance to enjoy it in a way I could never do as a tourist.

It’s good to know too that the value of this home is appreciating tax-free and out of the sight of virtually everyone.

Another advantage — the mortgage interest you pay when you finance the purchase of a second home is tax-deductible, provided that the property qualifies as a personal residence. You can deduct up to a combined total of $1 million in mortgage interest on your primary and second homes. A property is considered a personal residence if you use it more than 14 days a year.

Now … here’s what you need to know before you start looking for your second home:

* It may be more difficult to get a mortgage on a second home. And if you do, be prepared to pay more in points and a higher interest rate.

* Your second home needs to be maintained. This can get expensive. When you figure out the cost/income balance sheet, be sure to allow enough for maintenance. * Insurance can be more expensive too, especially if the home is not occupied for much of the year.

* Finally, you may grow tired of the second location but feel compelled to use it.

All these problems can be overcome if you observe these rules:

* Buy value. Select a home that is underpriced relative to the market. That way, if you should decide at some time in the future that you don’t want it you will be able to sell it quickly.

* Consider renting out the home for part of the year. Make sure it is the right size and in the right location to provide good and steady rental income. So long as you can get positive cash flow out of it, it will be a good investment for you.

* Be conservative. Resist the urge to overbuy. When it comes to a vacation home, keep in mind that you won’t be using it very much and therefore won’t need very much room — probably no more than two bedrooms. Get just enough so that the rental income you can get for it will exceed your expenses.

* Buy the most desirable location (from a vacationer’s point of view). To get a steady income from your second home, be sure the location is attractive to vacation renters. Renting a vacation home on a weekly basis is usually the most productive way of generating income.

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