Nick Forgione
Many people spend years daydreaming about the vacation home they’d like to buy someday. Sitting down with your financial advisors to talk about vacation property planning could help you bring those dreams to life. Buying a vacation property is an investment, and there’s more than one way to do it. Strategic financial planning can help you find the perfect home-away-from-home in a way that’s aligned with your financial goals.
WHAT TO EXPECT WHEN BUYING VACATION PROPERTIES
Owning a vacation property in a location you love means revisiting a favorite destination again and again, along with potential financial benefits. A second home or vacation property in a popular area could be a valuable investment. It could also become a legacy asset that’s passed down to future generations.
A second property could also be a source of passive income if you decide to rent it out when you’re not using it.
However, like any investment, real estate also comes with some potential financial risks. There may be out-of-state tax implications to navigate, or maintaining the property from afar.
CHOOSING THE RIGHT LOCATION
Deciding where to buy your vacation home is as important as choosing the property itself. Begin by considering what you want from your getaway— ocean views, a mountain retreat, or a lively urban experience. Your personal preferences should guide this decision. However, it’s equally important to research the local real estate market. Is the area seeing steady property value growth? Strong markets often provide better long-term investment potential. You may also find additional rental income opportunities in popular destinations.
Practicality matters too. Think about how easy the property is to access, particularly if you’ll visit frequently. Is it a long drive, a short flight, or something more involved? How will the necessary travel impact the frequency of your visits? Finally, assess whether the location has lasting appeal for you or potential renters. A property that’s both enjoyable and financially sound can be a valuable asset for years to come.
FINANCING OPTIONS AND STRATEGIES
A variety of financing options exist for purchasing a vacation home. Your financial advisor can help you understand what is available to you and fits with your financial plan. A second-home mortgage is a popular choice, allowing you to spread the cost over time. While this option often requires a larger down payment and carries slightly higher interest rates, it can make ownership more manageable. Another option is a home equity loan or line of credit on your primary residence. It typically offers lower rates by leveraging equity you’ve already built. However, this approach carries the risk of your primary home being used as collateral.
A third path, paying cash, eliminates monthly payments and interest costs, though it may tie up a significant amount of liquidity. Each option has its benefits and drawbacks, and the right choice depends on your financial circumstances and goals. Consulting with your financial advisors can help you determine the best way forward.
FINANCIAL PLANNING FOR BUYING VACATION PROPERTY
Here are some of the areas you can expect to discuss with your financial planning advisors as you plan to purchase vacation property.
- Aligning budget, financial goals, and expectations.
All prospective property buyers should be clear about what they can afford to spend and what that budget can buy in their target area. This is important for couples purchasing property together. Make sure both partners are on the same page when it comes to a comfortable budget. Your advisors can help you set realistic goals and expectations. Anytime you purchase property, your advisors can help you understand how it will also affect your financial and retirement plans.
- Tax, insurance, and estate planning.
Buying a second property, especially one located in a different state or country, will create new tax obligations. If you hope to rent out the property some of the time, you’ll have to plan around reporting that income and navigating tax rules specific to rental properties. Some of the tax advantages that you have on your primary residence are also unavailable on a second property. For example, there’s no capital gains tax exclusion when you sell an investment property.
Insurance planning is always important when buying property, especially if your chosen vacation locale is prone to hurricanes, wildfires, or other extreme weather. Understand the risks to your investment and your coverage if the property is damaged or destroyed.
Estate planning for a second home often includes creating a trust to hold the property. There are a few different ways to do this, but the overall objective is to move the property out of your estate to reduce your estate tax obligations and preserve wealth for future generations. You can also structure a trust to give you control over what happens to the property in the future: who inherits it, who can use it, how it’s maintained, and so on.
- Maintenance and management.
Since you won’t be physically there to maintain and protect your property all the time, there needs to be a plan in place to manage its oversight. That might mean choosing a home in a complex that has on-site property management, or hiring management services as needed. Those costs need to be built into your budget, along with anticipated maintenance costs. Even in your dream beach house, a pipe could burst at the worst possible time. Prepare for those expenses to mitigate headaches down the road.
READY TO GET AWAY? START VACATION PROPERTY PLANNING NOW.
Sachetta’s financial planning advisors want to help you enjoy your second home. Let’s talk about vacation property planning options and how you can make this investment and achieve your financial goals. Contact us today!
Nick Forgione is a Certified Public Accountant and holds a Master's Degree in Accounting from the University of Massachusetts Amherst. Since joining Sachetta in 2022 as an accountant, Nick has worked on projects on both the individual taxation and wealth management side of our company.