Considerations Before Purchasing a Vacation Home

With the arrival of summer and the waning of COVID-related travel restrictions, many of us are getting back to traveling! Whether we are looking for a quiet escape from the busyness of working life or a pleasant retreat to enjoy during our retirement years, many of us have thought about the prospect of purchasing a second home in our favorite vacation destinations. My family and I just returned from a camping trip in Minnesota, and I would be lying if I told you we were not daydreaming about owning one of the numerous beautiful cabins we passed by.

While at first it may sound like a wonderful idea, we’re going to cover some important considerations for you before purchasing a vacation home to ensure that this dream doesn’t become a nightmare!

Location

As the adage goes, the three most important rules in real estate are location, location, location! If you’re considering buying a vacation home, odds are you already have an idea of where you want to buy. But if you don’t, consider what you like to do on vacation, and look for a location that has the amenities you’re seeking (mountains, beaches, a lake, whatever floats your boat!).

Taxes

While you may be accustomed to your current level of property taxes on your primary residence, in highly desirable vacation areas (especially in other states), property taxes can be considerably higher. Make sure to talk with a real estate professional and/or lender in the area where you are house hunting to get a clear idea of what your property taxes could be, and budget accordingly.

State income taxes may also factor into the location of your vacation home. If you live in a state with income tax (like Kansas), and you’re looking at purchasing a second home in a state with no income tax, such as Texas or Florida (also WY, WA, AK, TN, or SD), you may consider switching your residency to the state without income tax.

This can be a long process, and each state may vary in rules, but to establish legal residence in a state without income tax, at a minimum you will likely need to change your vehicle registration, driver’s license, and where you vote, and take other steps to establish legal residency in another state.

Our Topeka fiduciary wealth management firm would suggest you consult with an attorney and/or check with the residency requirements of the state you are interested in relocating to.

How Much You’ll Use the House

Ask yourself how much you will realistically use a second home. If your honest answer is that you’d use it one week out of the year or less, you may want to reconsider the purchase. If you plan on spending every summer there for the next several years, then you’ll probably get enough usage out of it to justify the cost.

We humans tend to over-romanticize new and exciting purchases in our life, but once the initial excitement of the new vacation home fades, you want to make sure you still use the property enough to justify the ongoing expense.

When considering how much time you’d spend at a vacation home, it’s important to be honest with yourself, and be realistic. You would not want to have this property sit unused (or little-used) while you’re stuck paying for it year after year.

Renting It Out While You’re Not Using It

Admittedly, this subject could be an entire article on its own. Companies like Airbnb and VRBO have made it much easier to advertise and rent out your vacation home while you are not staying in it. I will add that you should proceed with caution and be sure to do your due diligence, but renting does have the potential to offset some of the costs of owning the property.

As a general principle, move slowly and be patient for the right property to show up. If done right, owning a vacation home, cabin, lake house, or condo can be a wonderful experience!

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Zac Pohlenz, CFP®

As a Wealth Advisor, Zac works every day to help clients reach their financial goals, and finds it satisfying to know that he has helped someone gain a new perspective that can help change their life.