While there are different meanings of the term “fractional vacation home ownership”, in simple terms such ownership involves several buyers each holding an equal part of title to the vacation property. Fractional vacation home ownership differs from a timeshare in that with fractional ownership you own real estate whereas with a timeshare you have a right to use a property.

There are certainly drawbacks with owning a property with other people because there’s more than one opinion or voice in any decisions pertaining to the property. Yet for many people, the benefits outweigh the drawbacks. With this in mind, let’s take a closer look at whether it’s worth it to buy a fractional vacation home. 

What you Should Know Before Considering Fractional Vacation Home Ownership

Owning a fractional vacation property comes with some unique considerations. Knowing what you should consider before you jump in headfirst into a shared vacation home is important. Here are some things you should think about.

Understand What you Own

Before you buy into fractional homeownership, consider what you own. Is it a traditional ski resort model where you buy a quarter interest and get a quarter use of the property? In this case, you own part of the property, giving you ownership rights, like you would have if you owned a home.

Other ownership models like those of certain private residence clubs give you rights to the club amenities and services, but you don’t have any ownership rights to the property itself.

Rights and Liabilities

Before you buy a shared vacation home, understand the rights and liabilities you’ll have or incur. Do you have pre-determined usage rights where you get to use the property for a portion of the year or is it a pay-for-use situation where you pay for the time you use the property, as do your co-owners?

As far as liabilities or responsibilities, consider:

• Who manages the property?
• Who makes decisions on how the property is handled, renovated, etc.?
• Who pays the expenses? How are they divided?

To get a more detailed understanding of what a property allows/requires, read the organizational documents, including any co-ownership agreements.

Annual Costs

In shared ownership arrangements you pay the proportion of the ownership. For example, if you have 25% ownership, you pay 25% of the expenses. In a pay-for-use approach, you are responsible for usage fees, which come out of your rental income. If your usage fees exceed your portion of the rental income, you’d owe the difference. 

Annual fees typically cover all maintenance costs and reserve requirements to cover the cost of any future updates or renovations.

Financing

It’s often much harder to get financing for fractional vacation ownership. If you can find a lender, you’ll likely have to meet strict requirements and have a large down payment. For this reason, it’s often best to invest in fractional homeownership when you can pay for your portion in cash.

Selling the Property

Owning a property with others means you often can’t decide to sell the property without their consent. In most cases, all parties must be on board. Your organizational documents may prohibit the sale of one partner’s ownership without the consent of every owner. In such circumstances, the only way you may get out of it is by selling to another co-owner.

Is Fractional Vacation Home Ownership Worth it? 

In order to answer this question, let’s take a closer look at renting vs owning a fractional vacation home and whether owning one is a good investment.

Renting vs Owning

When you own a fractional vacation home, you only have rights to it for a part of the year. For this reason, you may be asking yourself whether it would be better to rent a vacation home instead of own a fraction of a vacation home? So let’s consider an example. Let’s say a ski chalet in your favorite winter destination has recently come on the market for $40,000. For the purchase price, you will receive a ¼ interest and four weeks of personal use per year. Annual fees are $1,000 per year, increasing with inflation at approximately 3.0% annually. Let’s also assume that the value of the property appreciates in line with historical norms at 4.0% annually. Instead of buying a fractional interest, you could rent a comparable unit for $200 per night. Under the rental scenario, let’s also assume that rental rates increase with inflation at 3.0% annually and instead of investing $40,000 in real estate you invest in the stock market, realizing an annual return of 8.0% per year (slightly below historical norms). Here’s what these scenarios look like after 10, 20 and 30 years:

Ownership Scenario

Rental Scenario

Using the above scenarios, there doesn’t appear to be a clear winner. In the ownership scenario, you would be further ahead in years 10 and 20 but that changes in year 30 where renting appears to make more sense. Of course, the above scenarios are an oversimplification of the actual calculations and there are various assumptions that could prove to be incorrect. By going through this exercise, however, the answer may be clearer depending upon your circumstances. 

Do Fractional Vacation Homes Make Good Investments

You have many options to invest your money, so is a shared vacation home a good way to use your money? Like any savvy investor, a diversified portfolio is a good idea – it prevents a significant loss should one asset decline in value. But does it make sense to add fractional vacation home ownership to your investment portfolio? Here are some things to keep in mind:

• You only own a fractional interest in real estate, so you will feel less of an impact with the ups and downs of the market. Historically, though, the stock market outperforms real estate. Real estate only slightly beats inflation, whereas stocks have an average annual return of 9% – 10%. But comparing real estate to stocks is in many ways an apples to oranges comparison. Therefore the best situation is to invest in both – diversifying your portfolio.
• If your property is a part of a rental pool, focus on the net proceeds. How much will you walk away with after annual maintenance costs and other required fees? While the rent you bring in may look attractive, the annual carrying costs can pile up quickly. 
• Fractional interests are hard to liquidate. When you invest in stocks or bonds, you can sell them on the open market. When you want to liquidate a real estate investment that you own with others, you often must get their approval. For this reason, there are typically less interested buyers. Given shifting consumer preferences towards fractional ownership, however, that may be changing.

To determine what your rate of return might be based on various input scenarios, try our Real Estate ROI Calculator. 

Final Thoughts

If you are clear on the ownership rights and limitations, owning a shared vacation home can be well worth it. The pride of ownership and enjoyment of the property may outweigh the drawbacks, including the lack of control over decision making and the difficulty in reselling your fractional interest.

If you’re buying the property for investment purposes, you may have other (better) options including renting a comparable property versus owning it. The annual costs, for instance, can be quite high. Yet, investing in real estate is often a wise decision and there are benefits to buying a fractional interest, including being less exposed to market price fluctuations.

The post Fractional Vacation Home Ownership: Is it Worth It? appeared first on Vacation Property Online.

The Difference Between a Second Home and an Investment Property

Lenders must know what you’re doing with a second home since it can have many roles in your life. Any property that isn’t your primary residence could be a vacation home, part-time residence, or an investment property.

A “second home” is a property you use for your personal use. You may use it as a vacation home, visiting only a couple of times a year or as a part-time residence if you live in multiple areas, such as spending the winters in Florida and the summers in Chicago. You might even buy a second home that will eventually become your primary residence.

An “investment property” is a property you rent out to others. Lenders take a vested interest in this because investment properties have a much higher risk. You are more likely to default on the loan if your renter defaults and abandon the property than you would a property you use yourself.

So, while the guidelines in this article generally apply to second homes, lenders may have heightened down payment requirements for investment properties. Keep in mind, if you buy a “second home” in the United States, it must be at least 50 miles away from your primary residence for you to take advantage of the more lenient guidelines for second homes versus investment homes. 

Minimum Down Payment for Second Home

Any time you’re buying something other than a primary residence, you’ll need a larger down payment. Lenders require more “skin in the game” to offset the risk of default that second homes and investment properties have.

Since FHA loans aren’t an option for anything except primary residences in the United States, you’ll need conventional financing or a portfolio loan from a private lender. Either way, lenders typically require between 20% – 25% down on a second home to make it less risky for them. If you use the property as an investment property, they may require an even higher down payment.

In Canada, you may still get away with a down payment lower than 20%, but you’ll pay mortgage insurance on the loan until you owe less than 80% of the home’s value to make up for the risk. If you have a 20% down payment, you’ll increase your chances of securing conventional financing and you’ll avoid mortgage insurance. 

How Does a Higher Down Payment Impact Your Mortgage?

With a higher down payment, this lowers the risk profile from a lender’s perspective since you have more to lose should you default on your mortgage. As a result, you will likely have a larger pool of lenders willing to loan you the money at more competitive rates. This also means that you will need to borrow less money, resulting in lower interest payments over the life of the mortgage and lower monthly payments. Alternatively, you could stick with the same monthly payments that you would otherwise be making with a lower down payment and pay-off your mortgage quicker.

For the purposes of illustration, let’s look at some examples using the mortgage calculator below. Let’s assume you’re interested in buying a condo on the beach for $300,000. A bank is willing to provide you with a 30 year mortgage at an interest rate of 3.0% annually.

Note: for more detailed calculations, including a complete amortization schedule, try our Vacation Home Mortgage Calculator.

Scenario 1: Lower Monthly Payments

Using down payment scenarios of 10%, 20% and 30%, the table below shows the impact on your monthly payment and total interest.

So if you want to save over $250 a month in mortgage payments and more than $30,000 in interest, putting down 30% vs 10% will be the best option.

Scenario 2: Shortened Mortgage Period

If you’re hoping to pay off your mortgage as quickly as possible, then a higher down payment and shorter mortgage period may be a better option. Using the above scenario, let’s say you’re deciding whether to put 20% or 30% down. As illustrated in the above table, your monthly mortgage payment with 20% down equals $1,011.85. If instead you decide to put 30% down, then by making roughly the same monthly payments (~$995.84) you would be done paying your mortgage in 25 years. You’ve now shaved off five years of your mortgage and saved more than $35,500 ($124,265.89-$88,753.13) in aggregate interest payments.

As you can see, under either scenario you end up paying less interest because you’re borrowing less money.

Three Ways to Use Equity from Primary Residence to Come Up with Down Payment

In the US, you can typically borrow up to 80% of the home’s value, but this includes the amount of your first mortgage too. You can usually take out the difference and use it to meet the minimum down payment for a second home.

In Canada, you can borrow up to 65% of the home’s value, using the difference between the loan amount and your first mortgage as your down payment.

So how do you tap into your home’s equity to buy a second home? Here are three simple ways:

Home Equity Line of Credit

A home equity line of credit is a second mortgage on your property with a variable interest rate. It works like a credit card, where you can draw funds, using them how you need and make interest payments only on the amount you withdrew. 

Your interest rate may change monthly and you must make principal and interest payments to repay the amount you borrowed. In the US, repayment of the principal begins after ten years whereas most HELOCs in Canada have an indefinite period.

Home Equity Loan (Second Mortgage)

A home equity loan is a second mortgage with a fixed interest rate. You make principal and interest payments right away and receive the full amount up front. At closing, the lender takes second position on your existing mortgage. You can’t withdraw funds repeatedly like you can with a HELOC, but you have the reassurance of a fixed rate mortgage.

Cash-Out Refinance

A cash-out refinance is a refinance of your first mortgage. You pay off your first mortgage and receive the difference between the new loan amount and the payoff in cash to use as your down payment. Since it’s a first mortgage, it’s less risky for lenders and you may secure a lower interest rate.

Other Qualifying Criteria to Buy a Second Home

To qualify for a loan for a second home, you must generally meet the following requirements:

• Minimum 640 credit score, but a credit score over 700 increases your chances of approval and lowers your interest rate
• Maximum debt-to-income ratio of 43%, which includes the new mortgage and any existing debts
• Strong history of stable income and employment for at least the last two years
• No recent public records, such as a foreclosure or bankruptcy
• Proof you can balance both mortgages without relying on uncertain sources of outside income

Final Thoughts

The minimum down payment for a second home and other requirements are stricter than when you bought your primary residence. This is due to the increased risk profile of a second home. Before securing financing, you’ll need to differentiate between how you’ll use the home. Will it be a second home, or will you rent it out? There’s a big difference to lenders.

You must also ensure you qualify for the loan. Because you won’t live in the property full-time, lenders take a much higher risk lending you money. They’ll do their due diligence, ensuring you are a good risk and can afford the payments in addition to your current mortgage, if your primary residence still has a mortgage.

If you meet the relevant qualifying criteria, you can expect that most lenders will require a minimum down payment for a second home of 20% or more. 

The post What is the Minimum Down Payment for a Second Home? Guidelines, Mortgage Criteria and More appeared first on Vacation Property Online.

As a real estate investor and owner of a vacation rental property, I’ve dealt with numerous ownership questions first-hand. I’ve also read various resources over the years in order to supplement my own experiences. Yet, there are many different resources out there on various topics, from the true costs of owning a second home to the rules and regulations governing different vacation property types such as waterfront properties. As a result, it’s sometimes hard to get a clear picture of what you should know before buying a second home and what ownership is truly like. With this in mind, I set out to create one resource that provides you with everything you need to know before buying a second home and, in particular, a vacation home.  

I should point out that I use the terms “second home” and “vacation home” interchangeably, mostly because second homes are often bought as vacation homes. Still, if you’re looking to buy a second home for another purpose, such as a part-time residence, investment property or eventual retirement home, the principles discussed in this article will still be relevant. Also, while this article focuses on subjects that are relevant for vacation homeowners in the United States and Canada, most topics will be relevant in other jurisdictions. With this in mind, if you’re wondering whether buying a second home is right for you, then you’ve come to the right place.

For an overview of how to buy a vacation home, explore my article on How to Buy a Vacation Home: A Practical Guide.

Setting the Stage

As you contemplate buying a second home, keep in mind that you will have your own unique set of circumstances, from personal finances to the locations you are interested in. Therefore, you should seek appropriate advice from qualified advisors, including accountants, lawyers and realtors, in your hunt for a second home. I can’t emphasize enough the importance of utilizing each of these experts, who have saved me countless headaches and likely thousands of dollars. Still, based on my own knowledge and experience, this is everything you need to know before buying a second home.

Types of Second Homes/Vacation Properties

As you consider buying a second home, a logical starting point is to consider the various types of properties. First up are the usual suspects in houses, condos, cabins and cottages. 

Houses, condos, cabins and cottages

Each of these property types are fairly well understood so I won’t describe them in detail, other than to highlight what you really need to know for each: 

• House vs. condo. With a vacation house, you’ll have more privacy than a condo but also higher maintenance costs. One of the things I like most about my vacation condo is that it’s fairly hands off. I can leave it vacant for extended periods of time and, other than minimal upkeep, I don’t have to worry about major repairs or landscaping the yard, for instance. It does help, however, to have a proactive and well run strata (or HOA). Still, if you want more privacy and can handle more responsibility and expense, a vacation house may be right for you.
• Cabin vs. cottage. While cabins and cottages differ primarily by the materials used to construct them, I typically consider them one and the same. Sure there may be different maintenance considerations for a log cabin versus a brick cottage, but the premise is the same. Typically a cabin or cottage is located in a more remote location close to nature. Thus, in addition to the considerations above for a vacation house, you’ll need to take into account how remoteness will impact your use and enjoyment.

Waterfront and water-access only

Waterfront properties are unique for many reasons, including the additional regulations that govern such properties and additional maintenance required. They’re in high demand and as a result typically hold their value. But the premium paid for waterfront is not the only relevant consideration as you need to keep the following in mind before buying a second home on the waterfront:

• Home inspections. In addition to the typical items to look out for in a house inspection, corrosion caused by salt in the air and mildew/mold issues from higher moisture levels can all cause damage on a waterfront property. Boundary surveys, elevation certificates and water quality tests can also be important. For instance, how far above the sea level or the lake shore is the house and is the area prone to flooding? In short, be sure to hire qualified home inspectors, surveyors and other experts before buying a waterfront property.  
• Understand what you own. With waterfront property, it is particularly important to review the legal description to determine where the lot extends. Additionally, you will need to determine whether there are any additional encumbrances on title that would otherwise limit your use of, or access to, the waterfront. Whether the property is located in the United States or Canada, it may be worthwhile to run this by a real estate lawyer before buying a second home on the waterfront. 
• Understand the limitations that come with it. Understanding what restrictions come with the property and what you can build on it are particularly important. Governmental regulations on waterfront properties govern such things as site density, minimum building setbacks from the water, the kinds of uses that are permitted, whether you can build a dock or seawall and even building design. In the United States and Canada, you may also need approval from other government departments including the U.S. Army Corps of Engineers and Department of Fisheries and Oceans (in Canada) for work in and around the water.
• Additional maintenance. Not surprisingly, waterfront properties require additional maintenance and expense in order to keep the property in tip-top shape. Potential issues include:
  • Humidity resulting in mold 
  • Corrosion from salt in the air (in the case of oceanfront)
  • High winds causing structural damage 
  • Falling trees in open areas
  • Floods 

In order to combat these issues, consider storm-proofing the house and ensure you have adequate insurance coverage. In short, waterfront properties are expensive to maintain so be prepared to pay double a typical maintenance budget.

• Water-access only. For some, owning your own private piece of paradise is appealing yet the remoteness and/or inaccessibility of water-access only properties may deter some buyers. Obtaining financing for these types of properties can also be difficult. While not for everyone, the general feedback I’ve received from other owners is that water-access only properties are an affordable alternative if you have access to reliable transportation and are willing to forego modern day conveniences. 

Fractional ownership and timeshare

Fractional ownership structures and timeshares are also an affordable option for those interested in dipping their toe into vacation home ownership. I’ve personally never been drawn to these types of properties because I’ve always (a) viewed outright ownership as a better investment and (b) liked to have complete freedom and control in terms of the use of my property. With this in mind, this is what you need to know before buying a second home that falls into one of these categories:

• Fractional ownership.  With partial ownership, several buyers each hold an equal interest in the title to the property. This is different from a timeshare where title to the property is 100% held by you as the principal owner. As an owner of a fractional interest in a vacation home, you’re also often allowed to use the property for a longer duration than a timeshare. From an investment perspective, you may see an increase in the value of your fractional interest over time.
• Timeshare – With a timeshare, your usage rights will vary slightly depending upon the type (e.g. fixed week, floating etc.). You also have no control over the property and they are notoriously hard to sell. Yet, timeshares are quite affordable, there is less responsibility as an owner and you’ll have certainty as to where and when to take your vacations. For these reasons, a timeshare is a lifestyle purchase as opposed to an investment. Importantly, I’ve heard of too many cases of timeshare owners making emotional decisions when buying-in originally so be sure to take some time before buying.

Leasehold

An owner of a leasehold property has an exclusive right to occupy the property for a specified period, in some cases up to 100 years or more. At the end of the lease, the right to occupy the property reverts to the owner. For this reason, leasehold properties are typically more affordable and there are often restrictions with what you can do with the property during the term of the lease. If you’re looking at your second home as an investment property, then I would avoid buying a second home that is a leasehold since you don’t actually own the property and therefore don’t typically enjoy the same upside in price appreciation. 

Different Second Home Uses

In addition to buying a second home for vacation purposes as a “home away from home”, there are many different reasons to buy a second home. Here are a few insights I’ve learned over the years about these other specific uses:

Vacation home vs second home vs investment property

I find there is a lot of confusion as to the difference between a vacation home, a second home and an investment property and the implications of each. Importantly, the designation of your property can have implications on your mortgage terms and tax treatment. While I encourage everyone to obtain their own independent tax advice, here are some important things to know:

• Vacation home vs second home. In short, there is no real difference between the two. More specifically, a second home is a residence you intend to occupy for part of the year in addition to your primary residence. Typically, second homes are owned as vacation properties but they could be used for other purposes (such as a condo in the city for work). 
• Second home vs investment property. An investment property differs from a second home in that it is owned primarily for investment purposes, typically through rental income, rather than as a second residence. A vacation rental property is one such example of an investment property, where the primary purpose is to generate income from the property as opposed to using it as a second home. 
• Mortgage implications. Mortgages for second homes will typically be associated with stricter lending criteria and higher interest rates than primary residences. For an investment property, such as a vacation rental, you can expect interest rates to be even higher and even higher down payment requirements, although every lender will have their own lending terms. 
• Tax implications. Depending upon the designation of your vacation home as a secondary residence or revenue-producing investment property, and the thresholds set by the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA), you may be required to report and remit tax on any income derived from your property. Additionally, taxation of capital gains upon the sale of your vacation home is treated differently from a primary residence. 

For a more complete discussion of mortgage terms and tax implications for vacation homes, see below under Vacation Home Financing and Tax Considerations, respectively. 

Owning a vacation rental property

Thanks to the popularity of vacation rental platforms such as Airbnb and VRBO, it’s easier than ever to own and operate a vacation rental property. Yet there are many items to take into account before investing in one, from the tax implications of ownership to how to manage your property. While I speak to tax considerations a little later on, here are some other things you need to know before buying a vacation rental property:

• Short-term rental regulations. Many cities and towns in the US and Canada have restrictions on renting out your property short-term. This can range from a simple requirement to obtain a business license to an outright ban altogether so be sure you understand the local regulations. Rules can change overnight as well so it’s best to invest in those areas that cater to tourists, such as resort municipalities, where vacation rentals are viewed more favorably. 
• Vacation rental platforms. I’ve used multiple platforms over the years and each of them has their strengths and weaknesses. Importantly, it’s never a good idea to rely 100% on one vacation rental platform so I recommend using multiple platforms. I also recommend that you create your own website so that you can (a) take direct bookings through friends and family without having to pay any fees associated with rental platforms and (b) slowly build-up search engine optimization over time in order to show up in Google search results. If you do end up taking direct bookings, ensure you require a sufficient damage deposit and execute a short term rental agreement like the one provided here.
• Property management. When deciding whether to manage the property yourself or hire outside management, it ultimately comes down to your willingness to spend additional time and resources dealing with guests or whether you’re willing to pay someone else to do it. If you decide to hire a property manager, expect to pay between 25% to 30% of the rental fees. My wife and I manage our vacation rental and, in my experience, the biggest issue is finding good, reliable cleaners. If you’re willing to do the cleaning yourself then that’s one less issue to worry about. 
• Cell phone and internet access. This is more of an issue for remote properties, but you’ll need to be able to communicate with your guests and deal with issues as they arise. It’s therefore important to have reliable cell phone reception and internet access. 
• Insurance. This one should be obvious but you’ll need to ensure that your insurance policy adequately covers a vacation rental property. More specifically, be sure to understand the specific terms of your policy. For instance, my policy requires all guests to be 21 years or older so our house rules require it.
• House rules. Speaking of house rules, it’s important to establish house rules for your guests to follow. By doing so, you can minimize damage to your home and otherwise control the guest experience.
• Vacation rental mortgages. In order for your lender to properly assess the risk profile of your loan it will need to understand the proposed use of the property. Accordingly, be sure your lender is aware that you intend on renting out your property when you submit your loan application.

Owning a family vacation home

Dealing with family dynamics can be difficult when it comes to managing a vacation home that is shared by multiple family members. Establishing house rules and splitting up the time equitably between family members are each important. Having a proper exit strategy is also particularly important in case things don’t work out as planned or one of the family members experiences unexpected financial hardship. Before buying a vacation home with a family member, consider whether ownership as tenants in common makes more sense than joint tenants. With a tenancy in common, each family member may control an equal or different percentage of the vacation home and has the right to leave their share of the property to any beneficiary. This provides more flexibility than joint tenancy where, upon the death of an owner, title passes to the surviving owner. Note, however, that if there is a mortgage on the property, typically all borrowers sign the mortgage documentation meaning that if there is a default the lender may realize the debt on all family members.

Owning a weekend home

With a weekend home, the property will be vacant during the week when not in use, perhaps even over the winter months entirely. With this in mind, here is what you need to know:

• Costs vs benefits. With all vacation homes, and weekend homes in particular, you’ll need to ask yourself how much you can reasonably expect to use the property? In particular, ask yourself whether it makes more financial sense to rent versus own a place in your desired area. If you can regularly rent something for a reasonable price, then perhaps it makes more sense to rent instead of own.
• Travel time. Personally, I’ve always steered away from trips that are 3 hours or more unless I am planning on staying there for three or more days. Ideally, your total travel time will be under two hours if your vacation home will be used primarily for weekend use. Otherwise I just find that you spend too much time travelling to your destination as opposed to actually enjoying it. For other travel time guidelines, I find these rules of thumb useful. 
• Secure storage. If you want to avoid packing, securing and transporting all of your gear every weekend, such as a boat, ATV, paddleboard, kayak or canoe, I recommend having secure storage on site where these items can be permanently stored. 

Second Home Financing

Securing sufficient financing to buy a second home, with reasonable terms, may be the most important consideration for many would-be second homeowners. As mentioned earlier, mortgages for second homes will typically be associated with stricter lending criteria and higher interest rates than primary residences. For vacation rental properties, you can expect interest rates to be even higher in addition to even higher down payment requirements. For reference, even though I have a strong credit history, consistent income and sufficient savings for a 20% down payment, only one of the Big Five Banks in Canada was willing to lend to me when I purchased my vacation rental property and my mortgage was about 75 basis points higher than a mortgage for a primary residence. The reality is that there are fewer lenders willing to lend you money to buy a vacation rental, and those that do require a higher interest rate due to the increased risk profile.

Curious to know about how much you can afford in a second home? Be sure to explore this second home affordability calculator.

Based on my own experience, and the stated policies of major banks in the US and Canada, here is what you need to know:

• Credit score.  A credit score of 700 or more will increase your chances of approval, however a minimum of 640 is typically required.
• Interest rates. Expect interest rates to be as much as 0.25% – 0.5% higher than primary residence interest rates. For a vacation rental property, you can expect interest rates to be even higher (e.g. 50 to 75 basis points). With today’s low interest rate environment, however, it’s a great time to get affordable vacation home financing.
• Down payment. Expect to pay between 20% – 30% as a down payment. To lower the risk of default, lenders require higher down payments.
• Maximum debt-to-income ratio. Your debt-to-income ratio should be no more than 43% overall. Your debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt. This includes the mortgage on your primary residence, the new mortgage on your vacation home and any other outstanding debts. 
• Distance from primary residence. In the United States, if you want to take advantage of the more beneficial lending terms (e.g. lower interest rate) associated with second homes as opposed to investment properties, your second home must typically be at least 50 miles away from your primary residence. Otherwise, your second home may be viewed as an investment property in the eyes of a lender. In Canada, the distance from your home will similarly be taken into account as to whether you truly intend to use the home as a secondary residence or an investment property.

Some of the best ways to finance a second home include:

• Second home mortgage. This is the same as a traditional mortgage except that a second home mortgage will exist over, and be secured against, your second home as opposed to your primary residence. 
• Home equity line of credit. A HELOC acts much like a credit card in that you can borrow up to a certain limit and are only required to pay interest on the amount actually borrowed. In order to be eligible, you will need to have equity available in your existing home. Depending upon the lender, you may be able to utilize up to 80% of the equity in your home (or lower in the case of federal financial institutions in Canada), assuming there is no outstanding mortgage or other loan secured against your home.
• Second mortgage. A second mortgage is just that – a second mortgage over your primary residence. These are riskier from a lender’s perspective as the lender will be in second position to the first lender should you default. 
• Cash-out refinance. With a cash-out refinance, you cancel your existing mortgage and enter into a new mortgage with a larger amount than owed on the previous mortgage. You can then use the extra cash to buy a vacation home.
• Private lenders. If traditional banks won’t lend you money, then you may be able to obtain financing from private lenders such as friends, family, a private investor or even peer-to-peer online lending. Just be aware that private lenders typically charge higher interest rates and/or other fees given the heightened risk in lending to someone that the banks won’t.  

True Cost of Owning a Second Home

Before buying a second home, it’s important to understand the true cost of ownership in order to ensure you can afford the carrying costs. In my experience, people tend to underestimate ownership costs so you can expect your monthly bill to be higher. To begin with, let’s look at my own example.

For an accurate estimate of your monthly ownership costs, be sure to explore this cost of owning a vacation home calculator. 

Vacation Home Cost Example

As an example, here is a breakdown of the one-time costs and ongoing carrying costs of my vacation rental property (all in Canadian dollars), which was purchased for $715,000 at the beginning of 2019 and was partially furnished:

• One-time costs:
  • Down payment: $143,000 (20% of purchase price)
  • Property transfer taxes: $12,300
  • Conveyancing fees and disbursements (legal): $1,630.87
  • Minor renovations and furnishings: $4,743.41
  • Special assessment in Fall of 2019: $4,029.75
• Recurring costs (monthly):
  • Mortgage: $2,898.26
  • Property taxes: $246.96 ($2,963.52 annually)
  • Insurance: $70 ($840 annually)  
  • Utilities: $40
  • Cable, internet and streaming services: $122
  • Maintenance and repairs: nil 
  • Ongoing accounting and legal fees: $41.67 ($500 annually)
  • Strata fees: $557.83

Based on the above, my monthly carrying costs are $3,976.72 but I would expect that number to be slightly higher after factoring in additional nominal costs not reflected above. If I add the one-time costs (e.g. property transfer taxes, furnishings, special assessment etc.) and spread them out over the 2.5 years I have owned my home, my monthly carrying costs have been roughly $4,733.52 over that period. Further, while I have not yet spent any material amount on repairs and maintenance, I expect this will catch up to me soon and that my spending will be in line with a more typical allocation of between 1% – 4% of my home’s value being spent annually on maintenance.

Other costs that may be relevant depending upon the circumstances and location of your property include:

• HOA or resort fees
• Vacancy, general excise and other taxes (location/use specific)
• Management, cleaning and other vacation rental ownership fees

Despite your best efforts to plan for everything, I can attest to the fact that unexpected costs arise from time to time. If it’s not a special assessment from your condo association, then it will be your hot water tank or furnace that will give out. As such, keep some cash available for these unexpected costs. 

Opportunity Cost

Perhaps one of the most overlooked costs is opportunity cost, or the forgone benefit that would have been obtained from the next best alternative. This is not easy to calculate in every instance but I recommend trying this real estate ROI calculator. It’s a simple calculator that shows the expected return on investment (ROI) from your second home over the life of the mortgage and, for comparison purposes, the ROI should you instead choose to invest in the stock market over that same period. A little later on I will explore my own expected ROI from my vacation rental property and compare it against a stock market investment. In the meantime, let’s move on.  

Second Home Maintenance

As I’ve already covered off the principal costs associated with owning a second home, I won’t explore maintenance costs any further. I will, however, provide the following insight into second home maintenance generally:

• Less may be more. The more stuff you have in your home, the more that can go wrong. While AC units and hot tubs are nice to have, consider whether it’s necessary to have them in your second home. If not, you may be better off without them. 
• Prolonged vacancy. If your home will remain vacant for long periods, consider hiring someone to check on the property. In fact, you may not have insurance coverage if your home is left empty for 30 or 60 days, depending on the policy. By having someone check on your property every 30 days, you can typically satisfy the minimum requirements under your insurance policy. 
• Install a security system with remote monitoring. Consider installing a security system with remote monitoring to reduce risk of vandalism or theft. With smart video cameras, you also have the ability to keep tabs on your property in case of unexpected events such as a flood caused by bursting pipes or an electrical fire. 
• Winterizing. Simple steps to winterize your property will keep the cold out, the heat in and your energy bill down. Steps like flushing the water heater, adding window insulation film and adding draft guards under doors will all help and with only minor expense.   
• Storm proofing. If your second home is in an area that is prone to storms, you will save yourself a lot of headache by storm-proofing the house as much as possible. Adding storm shutters, trimming trees away from the house and removing clutter from around the yard are simple things you can do. Larger projects, such as structural upgrades, may be necessary and will require hiring qualified help.

Second Home Tax Considerations

First, a word of caution. Tax rules are complex and everyone’s circumstances are different. Accordingly, you should consult a qualified tax adviser in connection with your own tax planning. 

As you consider buying a second home, it’s important to understand the tax consequences of ownership. The two most significant tax implications of ownership are typically (i) taxation of revenue derived from your property and (ii) taxation upon the sale of your property. Let’s take a closer look at each.

Taxation of Rental Income

In both the United States and Canada, the IRS and CRA, respectively, will have an interest in any commercial activities associated with the property and, in particular, rental income. Thus, you will need to give adequate consideration to the tax consequences of renting out your second home.

In the United States, if you rent out your property for 15 days or more, then the IRS may view your property as a rental property. As a result, you will be required to report any rental income and pay appropriate tax. One of the benefits of operating a rental property, however, is that you can deduct various expenses, including property taxes, insurance premiums, condo fees, utilities, mortgage interest and depreciation. These deductions can then be used to offset a portion of the rental income, thus reducing your tax burden. Note, however, that if you also use your rental property as a residence, limitations may apply to the expenses you can deduct. According to the IRS, you’re considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of: (i) 14 days, or (ii) 10% of the total days you rent it to others at a fair rental price. An accountant with experience in this area will be able to advise you as to which expenses you can deduct based on your individual circumstances.

In Canada, if you rent out your property then you will similarly be required to report any rental income and pay tax on it. As an owner of a short-term vacation rental property, an important threshold to keep in mind is the annual revenue limit of C$30,000. If you exceed that limit over four consecutive quarters, you will be required to charge and remit GST/HST on any rental income. Keep in mind that, similar to the US, you’re also able to deduct appropriate expenses from any rental income to reduce your tax burden. 

Whether you’re located in the US or Canada, be sure to retain accurate records of the rental income you’ve received and all of the expenses claimed on your tax return in case you’re ever audited. The retention period is three years in the US and six years in Canada.  

Taxation Upon the Sale of Your Second Home

In the United States, if you have held your second home for more than one year, any profit on the sale will be taxed as long-term capital gains. Notably, tax rates for long-term capital gains are more favorable at 15% or 20% (to the extent that your taxable income exceeds the thresholds set for the 15% rate). Prior to selling your second home, you may want to consider the taxable exclusion of $250,000 ($500,000 if married filing jointly) in gains from sales of a primary residence. To qualify, you would need to treat your second home as a primary residence for at least two of the last five years prior to selling. Note, however, that a reduction is made on a pro rata basis to reflect the period of rental, vacation home or other “non-qualifying use”. Also, keep in mind the IRS’ rules on depreciation recapture tax upon the sale of a rental property. This occurs as a result of a taxpayer deducting the depreciation of a rental property from the taxpayer’s ordinary income. The taxpayer has to report any gain from the disposal of the rental property (up to the recomputed basis) as ordinary income.

In Canada, when you sell your second home any gain will be subject to taxation. This differs from the gain realized from the sale of your primary residence, which is tax-free. If you have not claimed any depreciation expense (or “capital cost allowance”), you will realize a capital gain or loss on the sale. If the sale price is more than your cost, one-half of the capital gain is included in your taxable income. If you claimed capital cost allowance, then selling the property may result in a recapture of your capital cost allowance. When you change your principal residence to a second home or rental property (or change your second home/rental property to your principal residence), it’s called a change in use for tax purposes and the CRA may treat it as if you sold the property. For a principal residence, you don’t have to pay tax on any capital gain up to the point of conversion to a second home. For a second home, any gain accruing up to the point of conversion to a principal residence is taxable. Lastly, if you’re collecting GST/HST as an operator of a short-term rental property, you are required to collect GST/HST on the sale of your property.

Pros and Cons of Owning a Second Home

Any discussion about buying a second home would not be complete without considering the pros and cons of owning a second home. With this in mind, here is my list of the pros and cons of owning a second home:

Pros

• Relatively secure investment. Real estate prices in the United States and Canada tend to go up over time and have not experienced the same volatility as other asset classes. 
• Additional ways to increase ROI. By owning a vacation home, you have the ability to maximize your return on investment through home renovations and/or rental income when the home is not in use (but be mindful of the tax implications).
• Borrowing is cheap. Given the low interest rate environment, borrowing money to buy a second home is cheap (assuming you meet the stricter lending criteria). Because of this, you can build wealth using the bank’s ‘cheap’ money.
• Hosting friends and family. Owning a vacation home is a great way to bring family and friends together as there will be no shortage of visitors.
• Retirement. What better way to plan for retirement than owning a second home as an eventual retirement home?
• Pride of ownership. Speaking from personal experience, one of the best things about owning a vacation home is the joy it brings. Quite frankly, this is often the biggest reason to buy a vacation home.

Cons

• Real estate historically outperformed by stock market. If you’re buying a second home for investment purposes, it’s worth noting that real estate in the United States and Canada has historically been outperformed by the stock market. 
• Lack of diversification. Spending further money on real estate may be risky, especially if you’re not well diversified in other asset classes. 
• Ownership isn’t passive. Unlike owning stocks, owning a second home isn’t passive as it will require ongoing time and commitment, from paying annual property taxes to renewing your insurance.  
• Ownership costs. The expenses can pile up pretty quickly as your second home will require ongoing repairs and maintenance.
• Usage may be less than you expect. This will certainly vary from owner to owner but you may find that you don’t actually use your property as much as you expect. I have historically only used my property roughly two weeks a year but then again I’m also operating a vacation rental property. 
• Vacation home moochers. While hosting friends and family is one of the benefits of owning a vacation home, you may also have to deal with freeloaders looking for a free stay.

Is Buying a Second Home Worth it?

With the above in mind, is buying a second home worth it? As mentioned previously, this real estate ROI calculator enables you to directly compare how a real estate investment will perform (with or without rental income) against a stock market investment. Let’s consider some return on investment scenarios using my own example:

• Vacation home purchase price: $715,000
• Down payment: $143,000
• Mortgage terms: 3.61% interest rate with a 25 year amortization schedule
• Monthly rental income: $5,000
• Aggregate monthly expenses: $2,000

Based on the above assumptions, the real estate ROI calculator shows that I’m netting an extra $102.58 per month in rental income, which would not be available if I instead chose to invest in the stock market. Therefore, I need to compare the value of my vacation home plus $102.58 in monthly rental income after 25 years against investing $143,000 (i.e. the size of the down payment) in the stock market over that same period with no additional contributions. Here’s what it shows under the following scenarios:

Scenario 1: Vacation Home Appreciates 4% Annually and Stock Market Grows 8% Annually

• Value of vacation home (and net rental income) at end of term: $1,971,116.09
• Value of stock market investment at end of term: $1,049,645.16

Scenario 2: Vacation Home Appreciates 4% Annually and Stock Market Grows 6% Annually

• Value of vacation home (and net rental income) at end of term: $1,971,116.09
• Value of stock market investment at end of term: $638,490.68

Scenario 3: Vacation Home Appreciates 2% Annually and Stock Market Grows 8% Annually

• Value of vacation home (and net rental income) at end of term: $1,209,119.17
• Value of stock market investment at end of term: $1,049,645.16

As you can see, I’m better off buying a second home in each of the above scenarios. Of course, the above doesn’t take into account appropriate tax planning strategies. For instance, by utilizing a tax sheltered account such as a 401K plan in the United States or RRSP/TFSA account in Canada, you may be able to shelter some or all of the tax burden of a stock market investment. All of the sudden investing in the stock market doesn’t look so bad, especially if you can’t claim a primary residence tax exemption under the vacation home scenario. The other difficulty is that not all of the benefits or drawbacks of buying a second home can be objectively measured. After all, you can’t put a price on the time spent with the kids (or grandkids) and the lifelong memories that result. On the flip side, it’s hard to quantify or value the additional time spent maintaining your property. Personally, I’m very happy with my vacation home. From the revenue it generates as a vacation rental to the joy it brings me and my family, I expect to hold onto it for many years, and ski trips, to come. 

With that, I encourage you to consider each of the items noted above in this article before buying a second home. This is certainly everything I wish I knew before buying my vacation home.

About the Author

Peter is a father, entrepreneur and real estate investor. Together with his wife, he owns and operates a vacation rental property in Whistler, BC and is eager to pass along his knowledge and personal experience.

The post Buying a Second Home: Everything You Need to Know Beforehand appeared first on Vacation Property Online.

For the purposes of this article, we’ve assumed that you are currently using your second home as a part-time residence, such as a seasonal home or vacation property. As you contemplate increasing the investment potential in your second home, you are now considering the consequences of converting your second home to a rental property.

Mortgage Considerations When Changing a Second Home to an Investment Property

You may be asking yourself, can I turn my second home into a rental property if I have a mortgage on it? The short answer is ‘yes,’ but there are several considerations. In particular, you must consider the terms of your existing mortgage before converting a second home to a rental property.

Most second home mortgages have more favorable terms than loans for an investment property. Lenders usually require lower down payments and offer interest rates lower than they would for an investment property. It’s against the law (i.e. mortgage fraud) to make your property look like a second home when you intend to use it as an investment property. As such, misrepresenting the home’s use has legal and financial implications. 

Lenders, however, can’t do much about a legitimate change in occupancy during the term of your mortgage. Just be aware that a change in your home’s occupancy status within the first 12 months of ownership may invite greater scrutiny from your mortgage provider. Further, when your mortgage comes up for renewal, your mortgage provider may choose not to renew your mortgage at all given the change in use designation and increased risk profile. Alternatively, if you refinance later down the road, you must also disclose the change in occupancy and secure an investment property loan versus a second home mortgage which may have different terms.

By default, if your second home is within 50 miles of your primary residence, most lenders in the United States will consider it an investment property since it’s too close to your property to consider it a ‘second home.’ You may have already run into this when you purchased your second home initially. In Canada, while there is no similar distance requirement, lenders will also take into account the distance of your second home from your primary residence for the purposes of determining the property’s intended use. 

At the end of the day, lenders have a vested interest in determining if the home will be a part-time residence for you or an income-producing property given the different risk profiles.

Tax Considerations When Changing a Second Home to an Investment Property

The summary provided below is for informational purposes only. Please consult with a qualified tax professional to understand your individual tax situation.

In the United States, homeowners must report all income earned on a property that they rent out for 15 days or longer. For example, if you rent out your home for two weeks (or 14 days) a year, you don’t have to report the income earned, but if you rent it out for 21 days, you’d report it. 

The good news is you can make several deductions running an investment property. The IRS considers it a business and allows you to take business deductions. Some common deductions include:

• Mortgage interest
• Cost of maintaining the property
• Property taxes
• Home insurance
• Utility costs
• Advertising
• Commuting costs if you visit the property for business purposes
• Cost of keeping an office to maintain your rental property

There are tax benefits to consider when selling the property too. In the US, by living in the investment property as a principal residence for at least 2 of the last 5 years (it doesn’t have to be consecutive), you may be able to take advantage of the capital gains exclusion normally available on the sale of a primary residence. When you sell your primary residence, you can exclude up to $250,000 in profits ($500,000 if married filing jointly), keeping in mind that these exclusion amounts are reduced on a pro rata basis to reflect the period of rental, vacation home or other ‘non-qualifying use.’ For a second home or investment property, on the other hand, there are no such exclusions on capital gains realized from a sale. 

Like in the US, Canadians are required to report any income derived from a rental property. If you own and operate a short-term vacation rental property, an important threshold to also keep in mind is the annual revenue limit of C$30,000. If you exceed that limit over four consecutive quarters, you will be required to charge and remit GST/HST on any rental income. Note, however, that you can make deductions (similar to the above list) to reduce your tax liability.

In Canada, changing a home from a secondary residence to an investment property may create a deemed disposition for fair market value in the eyes of the CRA. In other words, they may treat it as if you actually sold the property at the current value and re-acquired the property for the same price. If there are capital gains on the transaction, you must report them. Similarly, when you actually sell your investment property, you will also need to report any capital gain (since the deemed disposition). The CRA determines your capital gain by using the property’s adjusted cost base (original purchase price and eligible costs) and fair market value when you sell. The difference is your profit for tax purposes and one-half of the capital gain is included in your taxable income. This differs from the treatment of any gain realized when you sell your primary residence, which is tax-free in Canada. Lastly, if you’re a GST/HST registrant operating a short-term rental property, you are required to collect GST/HST on the sale of your property.

A quick note on claiming depreciation as an expense: In both the United States and Canada, you may be permitted to reduce your rental income by claiming a depreciation expense (or a capital cost allowance in Canada) over the useful life of the rental property. By doing so, however, you may be subject to a recapture payment so be sure to obtain appropriate advice before doing so.   

As you can see, the tax consequences of changing a second home to an investment property are complex and require the assistance of a qualified tax professional.

Other Considerations When Changing a Second Home to an Investment Property

While the mortgage and tax consequences are the largest consideration, you should also consider the following before converting a second home to a rental property:

• Insurance. You must update your insurance from a primary/secondary home to an investment property. The insurance premiums will generally be higher because of the increased risk of having someone else use the property versus yourself.
• Building codes. Is your rental property up to code? Mostly, these codes include specified minimum standards for the interior and the exterior of the building. As a landlord, you are liable for any code violations. 
• By-laws and zoning restrictions. If you own a condominium or other property governed by a homeowners’ association, strata corporation or similar entity, be sure to review the governing documents to understand whether rentals are permitted. There may also be local restrictions on rental properties in certain cities. For instance, many cities in the United States and Canada have short term rental restrictions in place to reduce problems associated with noise, parking, partying and trash. In the United States, this includes cities in California, Colorado and New York and in Canada this includes cities in British Columbia, Ontario and Quebec, among others.
• Business licenses or permits. Even if short-term rentals are permitted in your area, you may be required to obtain a business license or permit. For example, a tourist accommodation business licence is required in Whistler, BC and a short-term rental home (STRH) permit is required in certain areas of Maui, HI.

Converting Second Home to Rental Property  

As you can see, changing a second home to an investment property, or more particularly, converting a second home to a rental property, is possible, but there are several factors you must consider. Your lender, insurance provider, taxation authority and other government departments all have a vested interest in how you own and use the property.

Importantly, be sure to discuss converting your second home to an investment property with your tax advisor and attorney before making the switch.

If you’re considering converting a second home to your primary residence, be sure to explore our article on Buying a Vacation Property or “Second Home” That Will Be Your Primary Residence. 

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Before buying a second home, you will likely ask yourself can I afford a second home and, if so, how much second home can I afford? While everyone’s financial circumstances differ, there are certain guidelines to follow in the United States and Canada when preparing to buy a second home. In this article, we provide an overview of these guidelines in an effort to assist you in determining how much second home you can afford.

Following the success of our earlier article on How Much Vacation Home Can I Afford, we decided to write an article on second home affordability. While a second home and vacation home may be one and the same, there are important characteristics of a secondary residence, as opposed to a vacation rental property for instance, from a lending and tax perspective. For this reason, we explore these specific elements further below.

Summary

When asking yourself how much second home can I afford, you should consider the following:

• Difference between a second home and investment property
• Your credit profile
• Your debt-to-income ratio
• Size of your down payment
• Equity available from primary residence

Second Home vs Investment Property

A second home is an additional property that you plan to live in for part of the year. Often second homes are purchased as vacation homes in sunny locations or other recreational destinations. An investment property, on the other hand, is purchased primarily for investment purposes, often for the purposes of generating rental income. Because of this distinction, lenders and taxation authorities in the United States and Canada will have different treatment for each.

In the United States, the IRS may treat your home as an investment property instead of a second home if you rent out your property for 15 days or more. Similarly, by renting out a second home frequently, the CRA may view your property as a commercial enterprise as opposed to a secondary residence. As a consequence, you will be required to report any rental income to the relevant taxation authorities and otherwise deal with the additional responsibility that comes with operating an investment property. 

From a lending perspective, mortgage terms for second homes will typically be more favorable than mortgage terms for an investment property. This is due to the increased risk profile of an investment property (a borrower is less likely to default on a second home that they occupy for part of the year than a rental property). For borrowers in the United States, the property must typically be at least 50 miles away from your primary residence in order to enjoy the second home classification that is coupled with a lower interest rate. For borrowers in Canada, the distance between your primary home and second home may similarly be relevant to lenders for the purposes of determining whether you truly intend to use your home for personal use or investment purposes.

For reasons noted above, we have assumed that you will not be renting out your second home to any significant degree in order to offset your carrying costs. If, on the other hand, you do expect to rent out your second home, as a vacation rental for example, then you may be able to stretch your dollar further and increase your borrowing capacity. Some lenders may give you credit for up to 75% of the projected fair market rents determined with an appraisal when buying a second home.

Consider Your Credit History

Second home mortgage lenders require higher credit scores to ensure that you won’t default on the loan. Many lenders require at least a 640-credit score, but others may have even higher requirements. The higher your score, the lower your risk of default and the higher your chance of approval. 

Consider Your Debt-to-Income Ratio

Your debt-to-income ratio is an important financial measure when determining how much second home you can afford. Simply put, your debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt (total monthly debt payments divided by gross monthly income). The lower the ratio, the less risk there is from a lender’s perspective. Most financial experts recommend that your debt-to-income ratio represent no more than 30% for housing expenses, although that has as much to do with asset diversification as maintaining a comfortable debt level. A good rule of thumb is that your debt-to-income ratio should not exceed 43% overall. Certain lenders may require lower debt levels whereas others may permit a higher level, perhaps as high as 49%. Every borrower’s financial circumstances are different and every lender will have their own lending criteria so be sure to shop around.

Using a debt-to-income ratio of 43% overall, let’s consider an example. If you pay $1,600 a month for your existing mortgage and another $200 a month for the rest of your debts, your monthly debt payments are $1,800 ($1,600 + $200 = $1,800). If your gross monthly income is $7,000, then your debt-to-income ratio is 25.7 percent ($1,800 is 25.7% of $7,000). Using our second home mortgage calculator, you would be able to afford a mortgage of $269,461 using a 30 year loan period and 3.5% interest rate. Assuming you have saved up a 20% down payment of $70,000, you could afford a second home worth $339,461.

Second Home Mortgage Requirements

Second home mortgages will often be accompanied by larger down payment requirements, higher interest rates and stricter lending guidelines. The reason is that second home mortgages are more risky as owners may be more willing to default on their second home mortgage when faced with financial hardship. If you plan on generating rental income, you may be faced with even fewer lenders willing to lend to you. Further, you can expect even higher interest rates and down payment requirements for rental properties.

Assuming again that your second home will be primarily used as a secondary residence, you will likely be required to come up with a down payment of 20% or more of the purchase price. You can also expect to pay interest rates that are 0.25% to 0.5% higher than you would for a primary residence. 

For illustration purposes, if you’ve managed to save $50,000 towards a down payment, then you could afford a second home with a $250,000 purchase price ($50,000 is 20% of $250,000). If you’ve managed to save $100,000, then you could afford a second home worth $500,000 and so on.

Other Sources of Financing

If you don’t qualify for a second home mortgage or otherwise wish to explore other ways to finance the purchase of a second home, consider the following:

• Second mortgage on your principal residence – Not to be confused with a second home mortgage, a second mortgage on your primary residence involves taking out a second mortgage or doing a cash-out refinance on your first mortgage. If you have equity in your existing home, this may be a good option for you. 
• Home equity line of credit – Similar to a second mortgage, if you have equity in your home but want a flexible second mortgage, a HELOC may be a better option. It works like a credit card, giving you a credit line equal to the amount you can borrow. 
• Cash – This one should be obvious but if you have cash available, or can liquidate assets, you can purchase a second home with cash knowing that they make historically safe investments. 

Second Home Calculators

With the above principles in mind, be sure to explore our Can I Afford a Second Home Calculator and Second Home Mortgage Calculator. By inputting the relevant amounts, including your gross monthly income and debt payments, both calculators will help you determine the maximum purchase price and mortgage you can afford in a second home.

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You have more options than most people think including a traditional mortgage, of course, but there are several other options that may open up your opportunity to buy a vacation home.

Check out how to finance a vacation home below and see just how easy it is.

Before buying a vacation home, be sure to also explore our article on How to Buy a Vacation Home: A Practical Guide.

Traditional Mortgage

Just like when you bought your primary residence, you can secure a traditional mortgage to buy a vacation home. Most lenders have stricter lending criteria when you buy a home other than a primary residence because the risk of default is higher.

This doesn’t make it impossible to secure vacation home financing, though. Knowing ahead of time the requirements you’re up against will help you ensure you qualify. Here’s what you must know:

• Interest rates can be as much as 0.25% – 0.5% higher than primary residence interest rates. Today’s low interest rate environment, though, makes it a great time to get affordable vacation home financing.
• You’ll likely need a 20% – 30% down payment. To lower the risk of default, lenders require higher down payments. The more money you invest in the home, the less likely you are to default.
• Your maximum debt-to-income ratio should be 43%. This includes the mortgage on your current home, the new mortgage on the vacation home, and any other outstanding debts you carry.
• For borrowers in the United States, the property must typically be at least 50 miles away from your primary residence in order to enjoy the “second home” classification that is coupled with a lower interest rate. For borrowers in Canada, the distance between your primary home and vacation home may similarly be relevant to lenders for the purposes of determining whether you truly intend to use your home for vacation or investment purposes.
• If you rent the property out when you aren’t using it, your bank may classify it as a rental property. Investment properties have tougher restrictions and higher interest rates, so make sure you’re clear on what/how you’ll use the property.
• If you use the property as a rental, you may be able to use up to 75% of the rental income (fair market rent for the area) as income to help you qualify.

Home Equity Line of Credit

If you don’t want a traditional mortgage, you can leverage the equity in your primary residence when deciding how to pay for a vacation home. For this method to work, you must have equity in your home. Most lenders allow you to tap into up to 80% of the home’s value less the amount you owe on your first mortgage (although HELOC loans with federal financial institutions in Canada are limited to 65% of the home’s value). The difference between 80% of your home’s value and your current mortgage balance is the money you can use to buy your vacation home.

HELOC loans have many benefits including:

• Interest-only payments are all that’s required. You only pay interest on the money you withdrew too. For example, if you took out a line worth $150,000, but you only used $100,000, you pay interest on $100,000, not $150,000. After a certain period of time, however (e.g. ten years) you may owe regular principal and interest payments.
• HELOC loans have less strict guidelines than vacation home loans. If you have decent credit and an average debt-to-income ratio, your chances of approval are high.
• HELOC loans have fewer closing costs than a traditional loan because there’s not as much work involved in underwriting and processing the loan since it’s on a property you already own.

Many people use HELOC loans to finance properties that would be difficult to finance through a traditional mortgage. A few key examples include buying land or remote properties that have no comparable sales making lenders wary of lending on them.

Second Mortgage

A second mortgage is another way to leverage the equity in your primary residence. This is often the best way to use the investment you’ve built in your residence. A second mortgage is a fixed loan, much like your first loan. You pay principal and interest payments on a fixed term, just like your first mortgage.

Most lenders allow you to borrow up to 80% of the home’s value on a second mortgage, just like the first mortgage, if you’re taking the cash out to pay for a vacation property.

The underwriting requirements are a bit tougher than a HELOC because you receive the funds in one lump sum at the closing. You can use the funds for the down payment or to pay for the home ‘in cash’ if you have enough equity.

Private Lenders

If you don’t qualify for any of the traditional mortgage options above when deciding how to finance a vacation home, private lenders may be your best option.

Private lenders could be anyone – friends, family, a private investor, or even peer-to-peer lending online. Private lenders set the requirements including the interest rate and term. They’ll assess your qualifications much like a bank would, but based on their own terms, so it’s usually much easier to qualify.

Private lenders usually charge much higher interest rates and/or fees because they’re taking a large risk lending to you. They are investing their capital in you versus investing in the stock market or any other asset. They expect a high return on their investment in exchange for the benefit they’re offering you.

Cash

Of course, there’s always the option to pay in cash. If you liquidate assets (sell stocks or another home, for example), you can invest the money in your vacation home. While it may feel like a big leap to spend hundreds of thousands of dollars on a home in cash, it’s an investment.

Since homes appreciate, you’re investing your money, letting it grow, while providing you and your family with the luxury of owning a vacation home to enjoy.

Final Thoughts – How to Finance a Vacation Home

Knowing how to finance a vacation home is one of the most important considerations in the process. Be sure to explore your financing options to determine how to pay for a vacation home and make your family’s dreams come true. Once financing is arranged, you can then proceed with the next steps to buy a vacation home.

If you’re curious as to how much you can afford towards a vacation home, explore our calculators here.

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But mortgage rates are typically higher for vacation homes for one good reason – risk. Lenders view a home you don’t live in full-time as risky. You don’t have as much to lose if you default on a vacation home as you do if you default on your primary home. You’ll still have a place to live, but the bank would be out their money.
So, how much higher are vacation home interest rates, and what do you need to know? Check out our guide below on vacation home interest rates.

What rate can you expect?

Of course, everyone wants to know – what’s the rate? While every situation differs based on the property, your qualifying factors, and the market, you can expect to pay rates that are 0.25% to 0.5% higher than you would for a primary residence.

Today’s interest rates are still low, making it a great time to buy a vacation home. On average, primary homeowners pay 2.875% – 3.0% in the United States (according to the posted rates of the “Big 4 Banks”) and 2.34% – 2.65% in Canada (according to the posted rates of the “Big 5 Banks”). For more information on these rates, click on the following links:

• US Banks: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo
  
• Canadian Banks: Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank

Based on these average rates (using today’s rates), vacation homebuyers can likely expect to pay 3.125% – 3.5% in the US and 2.59% – 3.15% in Canada.

How do you secure the best rate?

The rates above are estimates – the actual rate you’ll receive depends on your qualifying factors. Because vacation homes have higher risks, lenders often charge higher vacation home interest rates, but to keep your rate down, do the following:

Improve your credit score

Pull your credit (free copies for US borrowers here and Canadian borrowers here) and see what you can improve on. Do you have late payments? Bring them current. Did you overextend your credit cards (that charge more than 30%)? Pay the balances down. Also, don’t apply for any new credit between now and when you want to apply for a vacation home loan.

Keep your debt-to-income ratio low

Your debt-to-income ratio tells lenders how much you can afford based on your current debts. The lower your DTI, the more mortgage you can afford. The lower you keep your debts, the higher your chance of securing the lowest interest rates.

Shop around

No matter your qualifying factors, it’s always important to shop around for the best vacation home mortgage rate. The rates mentioned above are for illustrative purposes, and are the best rates a lender may offer, but only to those with great qualifying factors.

What are some of the vacation home lending criteria?

Every lender differs in their requirements, but you’ll likely need to meet these requirements to qualify for a vacation home loan.

• At least a 640-credit score – Vacation home lenders require higher credit scores to ensure that you won’t default on the loan. Many lenders require at least a 640-credit score, but some require even higher scores. The higher your score, the lower your risk of default and the higher your chance of approval.
• 20% or higher down payment – Most lenders require a 20% – 30% down payment on a vacation home. The higher down payment reassures lenders that you’ll make your payments on time, so that you don’t risk losing the thousands of dollars you invested in the home.
• Debt-to-income ratios of 43% or less – Your debt-to-income ratio tells lenders how much debt you have outstanding compared to your monthly income. They use this number to determine if you’re an acceptable risk and how much they should (or shouldn’t) adjust your vacation home mortgage rate to account for the risk. For more information on how to calculate your debt-to-income ratio, click here.

Alternatives to second home mortgage

If you don’t want to pay higher vacation home interest rates, there are alternatives to secure financing to buy your dream vacation home.

• Second mortgage on your primary residence – If you have equity in your primary home (the difference between the home’s value and what you owe), you can use it to buy another home. You’ll need to take out a second mortgage or do a cash-out refinance on your first mortgage to get the cash, but you can use it as a down payment on your vacation home.
• Home equity line of credit – Similar to the above, if you have equity in your home but want a flexible second mortgage, a HELOC is a good option. It works like a credit card, giving you a credit line equal to the amount you can borrow. You owe interest only on the amount withdrawn (used). After a certain period of time, however (e.g. ten years) you may owe regular principal and interest payments. This can be a good way to get money for the down payment on a vacation home.
• Reverse mortgage – If you’re 62-years or older in the United States or 55 years or older in Canada (both you and your co-borrower) and you don’t have a first mortgage on it, you can use your home’s equity to buy a vacation home. Many retirees do this to enjoy their golden years in another home without taking out a mortgage. Reverse mortgages don’t require repayment until the owner moves or passes away.

Other considerations

If you plan to rent out your vacation home while you’re not using it, you may be able to use the projected rental income in with your income to secure a mortgage. This may increase your borrowing capacity (allowing you to borrow more) or allow lenders to give you a lower vacation home mortgage rate if it decreases your debt-to-income ratio or serves as a compensating factor.

Overall, a vacation home is a higher risk for lenders, which means you must illustrate that you aren’t a high risk of default. If you’re curious about how much you can afford on a vacation home mortgage or what it would cost you, use this vacation home mortgage calculator to see where you stand.

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For the purposes of this article, we have assumed that you are considering buying a resort property comprised of buildings and facilities located together that provide lodging, entertainment and other amenities for visitors. With this in mind, let’s weigh the pros and cons of purchasing one.

Being Your Own Boss

One of the most valued aspects of buying a resort property is being your own boss. As the owner of the property, you set the rules and hire the workers. You are in charge, which allows for more freedom than you typically have as an employee.

Being your own boss can help push you to perform to the best of your ability. It also allows you to set your own salary and gives you permission to do basically anything. However, there is also a drawback to being your own boss: the stress of running your own business. If you are the sole person in charge of your resort property, you will have a lot of details to keep organized. Hiring other workers, maintaining a proper budget, and keeping everything in order and running correctly will certainly lead to more stress than you might be used to.

Income Potential

Having greater income potential is almost always a good thing. In particular, increased income gives you the ability to hire others to take care of some of the aforementioned stressors. Overall, as your business grows you will be able to hire more people to take care of tasks that you might have otherwise performed on your own.

While buying a campground or other resort property will cost you money in the beginning, the pay-off can be quite lucrative. As you learn the ropes, you will be able to make improvements with a view to increasing revenue. As revenue increases so too will your income.

Access to the Landscape and Facilities

If you own an RV park or other resort property, you will have access to the surrounding landscape. This may include lakes, rivers, and hiking trails. Experiencing your resort’s beautiful surroundings will no doubt bring you great joy and inspiration. Even if the resort property is not particularly scenic, you will have the ability to create your own piece of paradise.

If you are an active person or otherwise enjoy resort-style amenities, buying a hotel or other resort property will give you the opportunity to utilize the facilities. Swimming pools, tennis courts, and other sporting areas that are otherwise difficult to access are now in your backyard. Rather than paying hundreds, if not thousands, of dollars a year to be granted access to these types of facilities, people will now be paying you to utilize these areas. 

Social Benefits

Buying a bed and breakfast or other resort property will not only give you a wonderful location at which to host friends and family but also provide a reason for doing so. Whether its conversations over a morning coffee or campfire sign-along, social interaction is never far away. Not to mention, owning a resort is a great conversation starter!

Hard Work

If buying a resort property seems like it will be an easy venture, you might want to think again. While there are many benefits to owning a resort property, there are certain drawbacks that you will want to consider as well.

For instance, if you dream of earning a truly passive income then buying a resort property may not be for you. Owning a resort property is active work, literally as well as figuratively. It can be grueling at times and enjoyable at others. Be sure that you are prepared to play an active role in the management of the resort before jumping into buying a resort property.

A Seasonal Job

Very few locations are perfect for vacationing year-round. Because of this, almost all resorts are seasonal. In turn, this makes your job seasonal. Once your resort has been established for a few years, it may make enough money for the seasonality of the job to not be an issue. However, for newly established resorts or those with prolonged slow seasons, you may need to have a second job or otherwise preserve cash in the slow season.

Economic Dependability

The reality is that you will be solely dependent upon the success of the resort and the travel industry in general. Largely, the travel industry depends upon the economy. When vacationing families are doing well economically, they will visit your resort often. However, when the economy is in a downturn, you will almost certainly experience a loss of visitors and therefore a loss of income. Similarly, worldwide pandemics such as COVID-19 can put an abrupt halt to travel.

While this can be expected, it is difficult to predict. Be sure to maintain adequate savings in order to keep your resort running throughout economic downturns or other adverse events.

Unpredictable Weather

A drought, prolonged rainy season or other irregular weather occurrence can impact the number of visitors. Even during the mild season in your area, there can be unpredictable weather occurrences. Storms and other undesirable weather conditions can cause guests to cancel their visit (or not schedule one in the first place).

Even worse, natural disasters can cause damage to your resort property. This can result in a need to shut down the resort for an unknown period of time, resulting in loss of income from lack of guests as well as repair costs.

Repairs and Maintenance

Last but not least, when thinking about buying a resort property you will need to consider the burden of repairs and maintenance. A 30 unit hotel with a pool will have much different maintenance requirements than a small bed a breakfast. Similarly, a small campground will have much different requirements than a waterfront fishing lodge. 

Importantly, before you buy the property understand the scope of repairs and maintenance. If specialists will be required, or the scope of the work requires more than one person, then you will be dependent upon qualified staff. If, on the other hand, you can handle the repairs yourself then you will need to be prepared to do the necessary work annually.

Ready to Buy a Resort Property?

Now that you have taken these pros and cons into consideration, you are ready to buy a resort property! Well not quite. Be sure to conduct proper due diligence on the resort property, including a careful review of the financial records. Hire properly qualified advisors to assist with the purchase, including legal and accounting. If you need financing, talk to your bank early in the process and be prepared to submit a detailed business plan.

After completing necessary due diligence, getting input from your advisors and considering the above, you can confidently purchase a resort property and feel good about your decision.

Visit our website again soon for more tips and resources on buying, selling and owning a vacation property.

The post Buying a Resort Property: Pros and Cons of Owning a Hotel, Campground or Similar Property appeared first on Vacation Property Online.

As you approach retirement, you may be considering buying a retirement home early. Whether its downsizing to more modest accommodations or moving to a sunny destination, there are many reasons for buying a retirement home. Many people, however, won’t give much consideration to retirement living until their twilight years. Naturally, it’s not high on the priority list when retirement is ten years away or more. Yet, there are many reasons why buying a retirement home before you retire may be a good idea. In this article we explore the top reasons to buy a retirement home early including, you guessed it, buying a vacation home for retirement.

Buying a Retirement Home: When, Where and What to Expect

Before buying a retirement home early, consider the following:

When to Buy a Retirement Home

If you are considering buying a retirement home early, at which point should you consider doing so? In short, you should begin looking sometime before your planned retirement, whether it be 55, 65 or 70 years old. For most retirees in the United States and Canada, this will typically happen on or before the average retirement age of 66.85 years and 64.75 years, respectively. Otherwise, timing will depend on a number of factors, including your career goals, individual financial picture and family obligations.

Where to Buy a Retirement Home

What better place to start than the top retirement destinations in North America? In the United States, top retirement destinations include Florida, California, Texas, Hawaii and Colorado. In Canada, British Columbia (the Okanagan and Vancouver Island), Alberta (Canmore and Cochrane), Ontario (Niagara on the Lake, Kingston and Stratford), Quebec (Rimouski, Joliette and Quebec City) and New Brunswick (Moncton) are all popular destinations. If you are considering retiring in Canada, be sure to check out our list of the best places to buy a vacation home in Canada.

What to Expect in Retirement

Everyone will have their own unique plans for retirement, yet patterns emerge among specific generations of retirees. For instance, Millennials may be more inclined to travel during retirement whereas Baby Boomers may be looking to spend more time with family. Anticipated retirement activities will necessarily have implications on where you retire and overall retirement spending, amongst other considerations. In terms of the latter, according to a 2018 survey average annual spending by retirees was US$49,441, compared to US$65,834 spent by workers. Broken down further, on average retirees spent US$16,681 on housing, compared to US$21,339 spent by workers. The trend is clear: retirees typically spend less overall, including on housing costs. Accordingly, you can expect to spend less on retirement housing.

Top Reasons for Buying a Retirement Home Early

With these preliminary matters out of the way, here are the top reasons for buying a retirement home before you retire.

Move at Your Own Pace

By purchasing a retirement home early, you have the time and flexibility to move at your own pace.

Rather than an abrupt transition to retirement living, you could decide to slowly move into your new home. This may entail a temporary move for a portion of the year or regular weekend use until you’re ready to move permanently. Whatever the case, this will afford you the opportunity to familiarize yourself with new surroundings and ensure a more comfortable transition.

An early purchase may also allow you to make an opportunistic purchase when prices are low. At the very least, you can avoid a rushed purchase. This has the added benefit of allowing you to sell your primary residence when you’re ready. In short, you can buy and sell when it suits you and take advantage of market opportunities.

Of course, the best laid plans are subject to change. By purchasing a retirement home early you may avoid the biggest mistake of all: moving in the first place. Perhaps, after spending some time at your new home and getting to know the area you’re no longer set on retiring there. Maybe the climate isn’t to your liking or the location is too far from the grandkids. By buying a retirement home before you retire, you have the ability to change your mind.

 It’s Vacation Time: Buying a Vacation Home for Retirement

What better way to transition to retirement than by spending vacations at your new home with friends and family? This is a great way to not only get you comfortable with your new surroundings, but also your loved ones who may be more inclined to visit after having already vacationed there.

From a financial standpoint, you have the option of renting out your home part time to cover expenses in the interim. If you’re more hands off then you can use a property manager who will take a portion of the rental fees. For those that are happy managing things themselves, there are any number of vacation rental websites including Airbnb and VRBO.

Take Advantage of Maximum Borrowing Capacity While in Prime Earning Years

With interest rates being at historical lows, now may be a good time to take advantage of your maximum borrowing capacity.

By taking out a mortgage on your retirement home now, you can borrow money while still in the workforce. This money may not otherwise be available in retirement given your reduced income level. More importantly, you can borrow now and pay-off your mortgage over time (and ideally before you retire).

This also provides a secondary benefit: forced savings. Instead of succumbing to unnecessary spending, you will be forced to exercise a certain level of fiscal discipline as you service the mortgage. Such fiscal discipline can certainly pay off over time, especially for those individuals that struggle with excess spending.

While not recommended, it may also be possible to withdraw funds from your retirement account to help with the down payment (but not without penalty).

Renovate to Suit Your Tastes

Home renovations are not only costly but also disruptive to your living conditions. For this reason, buying a retirement home early may be attractive in that it will allow you to renovate while living in the comfort of your primary residence. This is especially beneficial for larger renovation projects. Instead of living without a kitchen or bathroom for an extended period, you can live as you normally would while your contractor completes the necessary work.

By purchasing a fixer upper that requires substantial renovation, you can also save money. Instead of paying top dollar for a recently renovated home, you can potentially save tens of thousands of dollars by purchasing an older home. You then have the ability to pick and choose which renovation projects to complete and properly manage costs. To the extent there are cost overruns, its also important to have a financial safety net. By undertaking a renovation project while still in the workforce, you can at least take comfort in knowing you have another paycheck coming.

Understand Your Expenses

Admittedly there is a certain amount of guess work involved when determining how much money to save for retirement to cover necessary living expenses. What better way to understand your living expenses than owning a retirement home early? From how much it costs to maintain the house annually to how much groceries cost in the area, you will have valuable insight into your living expenses well before retirement. For instance, perhaps after owning the home for several years you realize that there are various maintenance expenses that you had not anticipated. Armed with this new information, you can adjust your retirement plan appropriately. Without this insight, it’s a bit of a guessing game.

Other Things to Consider Before Buying a Retirement Home Early

If you’re considering buying a retirement home before you retire, keep in mind the following:

• Obtain financial advice. Be sure to talk to your financial adviser to ensure that you can handle the extra financial strain. For instance, will you need to work longer in order to service another mortgage? If so, perhaps buying a retirement home early is not for you.
• Implications on asset mix. Consider the implications on your overall investment portfolio/asset mix. Owning a substantial amount of real estate may be risky depending upon how well diversified you are in other asset classes.
• Owning multiple properties. Be prepared to deal with the usual stresses of home ownership, including unexpected repairs and maintenance. If you will be renting out the property part time, who will manage the property? If you will be managing it yourself, are you prepared to deal with such a responsibility as you approach retirement?
• Changing preferences. Tastes and preferences may change over time so don’t expect everything to go according to plan. The further away from retirement you purchase your retirement home, the greater the risk is that your tastes will change.

To better understand the implications of converting a second home to a primary residence, be sure to explore our article on Buying a Second Home That Will Be Your Primary Residence.

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Owning a weekend home is an attractive proposition for many. Having the ability to leave at a moments notice to the country to enjoy some much deserved rest and relaxation may be reason enough. Or perhaps its the prospect of hosting friends and family at a place to call your own that attracts you. Perhaps even retirement planning enters the picture when buying a weekend home. Whatever the case, there are many legitimate reasons why it may be a good idea to buy a weekend home.

Before signing on the dotted line, however, there are certain items that you should consider beforehand given the magnitude of such a decision. In this article we explore the top 5 things to consider before buying a weekend home.    

(1) Is it Worth it (Costs vs. Benefits)

Its important to make a fully-informed decision and what better way to do so than by completing a cost-benefit analysis.

Will the prospect of regular weekend use of your new home and pride of ownership outweigh the costs of owning a weekend home? In particular, how much can you reasonably expect to use the property? Assuming the best case scenario, would it still make more financial sense to rent versus own a place in your desired area?

As a starting point, calculate carrying costs assuming a 10, 20 or 30 year ownership horizon. Now calculate the costs of renting in your desired location over the same period and see where you end up. For illustrative purposes, let’s assume the following:

• You are considering purchasing a 1,500 square foot cabin for $250,000, with 20% down on a 30 year mortgage and 4% interest rate.
• You plan on using the cabin for 30 days a year and comparable cabins can be rented for $200/night.
• Instead of buying a weekend home, you could invest the 20% down payment ($50,000) in the stock market for 30 years and expect a 6% return

The calculation would look something like this (without accounting for inflation):

Scenario #1: Buying a weekend home

• Initial down payment: $50,000
• Total mortgage payments over 30 years ($954.83 monthly): $343,739.01
• Total costs over 30 years (repairs, insurance, property taxes, etc. assuming annual 2% of the home value in maintenance costs and 2% in major repairs): $300,000
• Total value of cabin after 30 years (assuming 3.4% annual appreciation): $681,641.73
• Net gain/loss after 30 years: –$12,097.28

Scenario #2: Regularly renting a weekend home

• Total rental payments over 30 years ($6,000/yr):  $180,000
• Initial investment: $50,000
• Total value of original $50,000 investment in stock market after 30 years (assuming 6% annual return): $287,174.56
• Net gain/loss after 30 years: +$57,174.56

In the above scenario, it doesn’t appear to make financial sense to buy. Yet, if the cabin appreciates even 0.5% more annually, the result is another $100,000 in equity after 30 years. While its difficult to forecast such amounts with any degree of certainty, the above example should still serve as a useful guide in understanding the financial implications of owning a weekend home.

Regardless of whether or not it makes more economic sense to rent vs own, does ownership fit into your overall financial picture?

Owning a weekend home can have significant implications on your long-term finances. Talk to your financial planner to see if you can afford to buy a second home. For instance, purchasing a weekend home close to retirement may make sense especially with cash in the bank and a full pension on the horizon. It may similarly make sense for a younger couple to buy a vacation home in their prime earning years so that they can service the mortgage payments.  On the other hand, buying a weekend home before completing much needed renovations on your primary residence may not make the most sense. Ultimately there is no “one size fits all” approach and therefore its important to understand the overall financial implications of buying a weekend home. 

While owning a weekend home may be a good investment over the long term, the decision to buy is often made for other reasons. In particular, its important to acknowledge that the decision to buy a weekend home is often driven by an emotional desire to own. After all, can you really put a price on family memories at the cabin or the ability to recharge at the beach house at a moments notice? For some, these may be reasons enough to justify purchasing a weekend home. For most, however, financial considerations will also weigh heavily in the decision making process. 

The results of a cost-benefit analysis will undoubtedly be anything but black and white. By conducting such an analysis, however, it will help you better understand whether owning a weekend home is right for you.

(2) Consider the purpose of buying a weekend home

What is your motivation for buying a weekend home? If you’re buying primarily for investment purposes then you will have a different set of criteria from someone looking to buy as a place to eventually retire.

Similarly, if you’ve always dreamed of owning a second home to pass down to your children then you may not be overly concerned with the financial implications of ownership. If you are a true “weekend warrior” and plan on using your second home on weekends-only then you will yet again have different criteria to consider.

For those weekend-only users, perhaps a turn-key property is the best choice. Otherwise, it may not be worth the time spent fixing and maintaining your property relative to the amount of time you will actually use it. Further, if you will be primarily using it as a place for rest and relaxation, then perhaps a more rural setting away from the city will better suit you. If you’re an outdoor enthusiast then somewhere close to the beach, river, hiking trails or mountains would be obvious choices. Ultimately, in order to get full value out of a weekend home, as with any vacation property, you should ensure that it ticks all of the boxes, including location, facilities and amenities. 

(3 ) Consider distance, travel time and accessibility

Given that you will be only using your weekend home for short stays, travel time, distance and accessibility will all be important considerations. Ideally you will want a weekend home that is no more than 2 to 3 hours away, which rules out airline travel. Similarly, any time spent waiting at border crossings, ferry terminals or train stations will need to be taken into account.

Part of the draw of owning a weekend home is being able to leave at a moment’s notice and that may not be possible if you are reliant upon transportation methods that require advance planning. 

From an accessibility standpoint, are access roads, ferry services or other transportation methods available year-round? If not then you likely won’t be able to use the property for extended periods of time.   

For borrowers in the United States, keep in mind that a vacation home must typically be located at least 50 miles away from your primary residence in order to enjoy the “second home” classification that is coupled with a lower interest rate. For borrowers in Canada, similar considerations need to be taken into account. For a more detailed overview of these requirements, click here.

(4) Consider the local climate and seasonality

Its important to take into account any seasonal limitations when purchasing a weekend home. Owning a weekend home with year-round use will certainly be more attractive to ensure that you maximize use. On the other hand, owning a seasonal property that is only accessible during the summer months may be more difficult to justify, especially if you are typically on vacation elsewhere during such period thereby limiting the amount you can use your weekend home even further. 

You will also need to consider the required maintenance on the property as a result of local weather patterns. A ski chalet nestled in the mountains will require regular snow removal and upkeep. Similarly, an oceanfront house located in a jurisdiction prone to hurricanes will require regular care and maintenance, often at a moments notice. If your weekend home will remain empty for extended periods then appropriate arrangements will also need to be made to ensure that the property is maintained in your absence. 

(5) Will you be renting it out part time? 

If you are planning on renting out your weekend home part-time, keep in mind that weekends typically command the highest prices for short-term rentals. Further, there may be minimal demand for weekday rentals. Do your research ahead of time to get a better understanding of rental demand in the area. If you plan on using the home most weekends during peak season then you may not be able to rely upon much rental income during shoulder season. Alternatively, perhaps there is healthy demand locally for monthly rentals during the slow season which will help offset carrying costs.

Other things to keep in mind before renting out your weekend home include:

• Increased risk profile from lender’s perspective. As rental properties are often seen as higher risk, more stringent qualifying criteria may apply than if the vacation home is for personal use only. 
• Increased borrowing capacity. Depending upon the lender, they may give you credit for up to 80% of the projected fair market rents. 
• Tax implications. In the United States, the IRS uses specific thresholds to distinguish between a vacation home that is rented out part time and an investment property. In Canada, renting a vacation property more than occasionally could trigger a “change in use” of that property for income tax purposes. For a more detailed overview of these rules, click here. 

Quick hits: other items to consider

• Be sure to stay in the area before buying to ensure you enjoy the surrounding area.
• Having secure storage available at your weekend home will be useful if you want to avoid packing, and transporting, all of your gear every weekend.
• Similarly, having in-suite laundry will be useful if you want to avoid packing linens, towels etc.
• Is cell phone and internet service available? For some people, staying connected on weekends will be important whereas others may wish to completely disconnect. 

Is owning a weekend home right for you?

If you set realistic expectations regarding the costs and benefits of owning a weekend home, then buying a weekend home may be right for you. Its unavoidable that part of the decision will be an emotional one, which heightens the importance of fully-understanding the financial implications of owning a weekend home as well as the amount of time you can reasonably expect to use and enjoy the property. With proper consideration and planning, owning a weekend home can be a rewarding experience, both financially and from an overall enjoyment perspective.  

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