The Risks and Rewards of Buying a Vacation Home
By Mark J. Donovan
||Buying a vacation home is both an exciting and nerve racking experience, as is any major investment. I remember when buying our vacation home on Lake Winnipesaukee, New Hampshire not sleeping for several nights after signing the purchase and sale agreement. Though the vacation home was a small 40 year old musty camp, the cost of the home, due to the fact it was waterfront property, was 2 times the cost of our main home. Spending that type of money on a home (camp) that you plan to use only 20% of the time is a difficult decision.
The only comfort in my decision was that I knew the real estate market had been in decline for a few years and I felt I was buying the vacation home for a good price.
After buying the vacation home and becoming more comfortable with my decision, my wife and I decided to go one step further and tear down the camp and build a modern home on it. To this day we are pleased with our decision to buy a vacation home and to rebuild on the land.
|A decade later, and still owning our lake vacation home, my wife and I are now considering buying yet another vacation home. This time, however, in the Caribbean, and more specifically on St Thomas Virgin Island. Though the vacation homes we’ve been looking at in St Thomas are less expensive than our lake vacation home in New Hampshire, it is still a major investment and it is less accessible. Unlike our lake vacation home, it’s not an hour down the road for 10 dollars in gas. Instead, it’s an airline flight costing in the several 100s of dollars per person. It’s also a much different real estate market, though all of the U.S. mainland laws apply to St Thomas Virgin Island.|
Also, similarly to when we bought our first vacation home, the housing market in both the U.S. and St Thomas Virgin Island (STVI) has been hit very hard since the start of the housing crash in 2006.
When buying a vacation home it is important to understand why you are buying it, how you plan to use it, and how often you plan to use it. It’s also important to understand all of the costs associated with owning it, including not just the purchase price, but also the operational costs and even exit costs.
When buying a vacation home I look for it to meet three key criteria. First, I want to be able to enjoy it. In addition, I also want to make sure that others will also want to enjoy it including family and possible renters. Second, I want it to be a clearly good investment. Consequently when it comes to buying a vacation home the price has to be right.
Property taxes, insurances, and utility and maintenance costs can easily exceed $20K per year. If there is a mortgage involved, annual vacation home operating costs can be much higher. So when contemplating buying a vacation home it is important to consider how you’ll handle the annual operating expenses and whether or not you will rent it.
|When using your vacation home for rental income there are a number of other issues and concerns that you need to deal with, including, marketing it, servicing and cleaning it, collecting rent, and additional insurances. In addition, if you use a property rental agency you can expect them to take up to 50% of your rental fees for managing and servicing your property. The website www.VRBO.com is a great alternative to using property rental agencies, however watch out for vacation condos that do not allow you to rent your condo on your own.
These types of vacation condos are no more than glorified hotels that you are financially fronting and paying the operational costs for.
In the STVI vacation home we are considering we intend to rent it due to the fact that the home would be unoccupied for so much of the year otherwise. It would also be a waste to not let others enjoy the sun, sand and sea.
The only question in our mind that still remains is whether or not we rent it for short term rentals or long term ones. Short term rentals require more work, however you can pull in more revenue, if the vacation property is right for weekly visitors, e.g. beach front, amenities on site, and on-site support personnel to help out in the event of problems with the property during its rental.
Long term rentals can offer more stability and less work, however they can be fraught with nightmare tenants that you may not be able to easily evict and/or that could trash your home. Finding quality long term tenants can be tough, but once found the amount of work required to keep them happy is much easier than multiple short term renters.
So when considering buying a vacation home make sure to clearly understand how you plan to use it, how much you expect to use it, and how you will support its operational costs. Also, to ensure a quality investment, keep your emotion in check and don’t over spend. If your offer is rejected and you feel uncomfortable with offering more, then keep looking.
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