How to Buy a Vacation Home: 4 Considerations

Thinking of buying a vacation home? Then you need to time your purchase so you get the optimum benefit from your new property. In particular you need to ask yourself four questions:

Am I in the right financial shape to take on this obligation?

Do today's economic factors make buying now a smart move?

Is the vacation home market healthy?

Is this the best time of year to buy?

Am I in the right financial shape to take on this obligation?

If you're in a position to buy a vacation home, you're probably a smart adult with a proven ability to assess risk: It would be patronizing to warn you about the obvious issues that can arise when people overstretch themselves. However, there are three points that are worth more consideration:

  • Diversification: Putting this much cash into real estate might unbalance your overall investment portfolio. Most advisers recommend spreading assets across a number of different classes of investment.
  • Cash flow: Although the economic recovery seems to be gaining real traction, there are no guarantees it will continue. If you're planning to rely on rental income to keep this investment afloat, it might be a good idea to prepare some cash-flow spreadsheets that model income and expenditure under different rental-market conditions.
  • Taxes: Right now, you should be able to deduct mortgage interest on a vacation home on your IRS return, just as you can for your main residence. However, legislators are talking about changing the code so as to eliminate or cap this deductible. It may be prudent to leave all such deductions out of your calculations.

Do Today's Economic Factors Make Buying Now a Smart Move?

Purchasing a vacation home involves similar housing-affordability issues as buying your main residence. You want to buy when:

  • Mortgage interest rates are low, so your payments are at a minimum.
  • House prices are rising, so the chances of your building equity quickly (and avoiding negative equity altogether) are good.

Many insiders believe the very best time to buy was in 2012 when both mortgage rates and house prices were near their lowest. However, at the time of writing (mid-2013), they both remain very attractive, and the window of best opportunity looks to be narrowing rather than closing.

Fannie Mae's economic forecasters expect 30-year fixed mortgage rates to average 4.7 percent in the last quarter of 2014, while the Mortgage Bankers Association's predict that figure will be 4.8 percent. Those compare with 3.5 percent during the first quarter of 2013.

Meanwhile, data from S&P/Case-Shiller Home Price Indices were published June 25 under the headline " Home Prices Set Record Monthly Rise in April 2013." They showed that, as a national average, home prices increased 11.6 percent during the year ending that month.

Is the vacation home market healthy?

Although the wider property market can be a good indicator of the health of the vacation-home sector, it's important to recognize that they don't always overlap. However, the National Association of Realtors (NAR) monitors this sector, and its 2013 Investment and Vacation Home Buyers Survey contains some useful insights into 2012's activity

  • Sales of vacation homes jumped more than 10 percent that year compared to 2011: to 553,000 from 502,000.
  • That was 11 percent of all home sales.
  • 54 percent of vacation-home sales were non-cash transactions, presumably mostly involving mortgage financing.
  • Distressed sales made up 35 percent of vacation-home transactions.
  • The median vacation-home price was $150,000, up from $121,300 in 2011.
  • The typical buyer of a vacation home was 47 years old,= with median income of $92,100.
  • The median distance of a vacation home purchased that year from the buyer's primary residence was 435 miles, although 34 percent were within 100 miles.
  • Buyers of vacation homes expected to retain them for a median period of 10 years.

NAR chief economist Lawrence Yun explained some of the drivers behind second-home sales: “We had a strong stock market recovery, which helps more people in the prime ages for buying vacation homes. Attractively priced recreational property is also a big draw.”

Is This the Best Time of Year to Buy?

Chances are, you're going to get the best deal on your new vacation home if you buy during the fall and early-winter months. That's the time of year when private owners have taken all the rental revenue they're likely to receive that season, and are facing many months of bills and no income. It's also a time when the property is going to be looking less attractive than during the peak seasons.

Similarly, developers of new-build homes are likely to have made their budget forecasts based on vacation-time sales, and may be amenable to off-season offers, especially if they've failed to meet targets. Even if they have, they may well be up for a deal when you turn up, offering them money in the bank before they're expecting it.

Having said that, if vacation home prices and mortgage interest rates continue to increase quickly, you may find the discount you can secure by waiting for an off-season sale swallowed up by rising prices and costs.

Bear that in mind when picking your moment to act. In the current market, sooner may well prove better.

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