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Buying a Vacation Home

With a bigger salary, job security, appreciating homestead, and other wise investments, you might be thinking now is the right time for you to buy a vacation or second home. 

According to the 2019 U.S. Vacation Home Counties Report, the most recent county report compiled by NAR, the median price of vacation homes between 2013 and 2018 appreciated 36% compared to existing and new homes at 31%. Lawrence Yun, NAR’s chief economist, said, “As of 2018, household net worth reached an all-time high of $100.3 trillion – that’s nearly double from a decade ago….” 

By the 2020 pandemic, vacation home sales outperformed total existing-home sales. Between July and September 2020, sales rose a whopping 44% from the same period the year before, while existing home sales rose 13% during the same time. 

Like many vacation home buyers, you may be thinking of a great family getaway, especially while leisure activities are limited in your city by social distancing. You can also use a second home as an additional way to build equity. Some home buyers are using equity gains in their homestead to borrow against for use as a down payment for a second home or vacation home. 

There are other reasons to consider buying a vacation home. You can lease it out for income when you’re not using it, and let vacationers make your mortgage payment for you. Many buyers are also considering using their vacation property as their primary residence upon retirement. 

According to NAR, the vacation home, second-home and resort market differs from the primary residential market for two reasons. First, buyers’ interests are so diverse. Some want small, rustic getaways while others seek palatial luxury homes. Buyer profiles vary widely and include retirees, large and small investors, celebrities, and international clientele. Second, there are differences in the way homes are financed, taxed, and used as investments.  

Banks have stiffer qualifying requirements and charge higher interest rates for non-primary homes. explains that you can qualify for a conventional loan on a primary residence with as little as 3% down, but you’ll need at least a minimum down payment of 10% or more for a second home. There are rules as to the types of properties that qualify for a second home conventional loan: 

  • It must be a one-unit property that’s available and suitable for year-round use.

  • It must be occupied by you, as the borrower, for some portion of the year.

  • It must be controlled exclusively by you and not a property management company.

  • It cannot be a rental property or timeshare arrangement.

As of February 2021, Fannie Mae and Freddie Mac no longer back loans on buildings that offer too many short-term rentals in resort and vacation areas.  Their targets are not individuals who offer their units for short-term leases, but “condotel” buildings that are “organized centrally through management, rental, and realty companies,” reports the NAR. If you plan to buy a home as an investment, you’ll need at least 15% down. One advantage that can help is that mortgage lenders will often use 75% of your projected rental income as part of your qualifying process to get a loan. 

Keep in mind that there are different taxes and deductions that are applicable for a vacation home, depending on how you use it. You may decide to rent the home less than 14 days a year and not report the income or longer and report the income on your annual tax return. Ask your Berkshire Hathaway HomeServices network professional for more information. While they aren’t tax specialists, they can help you run the numbers and help you decide how you want to enjoy your vacation home.