Vacation home hazards
So you’ve fallen in love – not with the cute little blond with the polka dot bikini, but with the cute little vacation cottage with the aqua shutters directly on the beach. But before you write that deposit check you may want to have a serious conversation with yourself.
Let’s continue last week’s conversation about how great the market for vacation homes has been after the market was practically frozen as a result of the financial crisis. Sales for vacation homes were up 57 percent from last year according to the National Association of Realtors, and owning a vacation property has tons of lifestyle benefits as well as financial benefits. However, owning a second home that’s used part time and may be placed in a rental pool needs to be considered carefully.
First of all can you afford it? Vacation homes, like boats and sports cars, are emotional purchases and can quickly get you into trouble and put you over your head financially. Banks are particularly picky about lending money on vacation homes since they consider these purchases riskier. In bad economic times, borrowers are more likely to stop paying the mortgage on a second property than on their primary residence. In addition, larger down payments are required for vacation homes, frequently 25 percent, as well as higher FICO credit scores. Basically the lenders want you to be more invested in a vacation property than in a primary property.
As stated, prices are going up, so don’t get caught up in a buying frenzy which happened to a lot of people in the run up to the housing bubble. This might be the right time to buy while sale prices are still on the upswing, but at some point, it will level off, and like the stock market, it’s hard to time the marketplace, especially when you’re making an emotional purchase.
As in any property, home repairs, updating and insurance are expenses that have to be calculated into the cost of managing the property. We all know the insurance issues we are facing in Florida, where so many beachfront and waterfront homes are paying very high premiums for replacement coverage for both wind and flood. Also insurance companies will probably charge higher premiums for a vacation home since the home is considered to be not fully occupied year round, therefore, there is a greater risk of damage. Also, if you’re planning on renting the property part of the time as an investment, the insurance will also be more expensive.
Renting, of course, brings its own set of challenges from tenants doing damage to furniture wearing out quickly and needing to be replaced. If you place your vacation home with a rental agent to manage and rent, there will be a hefty fee eating away at any profits you may have wanted to defray your costs in owing the property.
However, if you’re looking for a vacation property a little more exotic than Anna Maria Island check out what’s going on in Cuba. With the current and future opening up of our relations with Cuba, Americans with cash are buying up properties with water views. Because of the limited number of apartments that can be purchased by foreigners, the prices are souring for upscale apartments built during Cuba’s golden era. With Cuba 90 miles from Florida Cuba could someday be the next Key West.
Everyone loves the feeling of being in love. Just make sure the affection you have for the vacation home you fell in love with is returned. Aqua shutters and sunsets won’t help if you can’t make the mortgage payment.
