As more and more Americans seek to invest in real estate, owning a vacation home is slowly becoming a pipe dream. According to 2019 housing statistics, 65.1 percent of the population currently owns at least one home, and the temptation of obtaining a second place—to use it simply for getting away and relaxing—is understandable.
A vacation home is a lovely extravagance. It allows you to get away from your everyday surroundings. It may provide you with regular, easy access to milder temperatures and your favorite recreational activities in some situations. Perhaps you’d like to spend some of the winter season just a short drive from Florida’s golf courses and tennis courts, or you’d like to have ski-in/ski-out access to a Rockies ski resort. If you reside in the country, you might want to consider a stylish city loft.
More than 10 million Americans own vacation homes. It’s no secret that many individuals dream of owning one. Before you even consider buying one, though, you should ask yourself, “Can I afford a vacation home?”
A vacation home is a secondary dwelling that is not the owner’s primary residence and is mostly used for leisure purposes such as vacations or holidays. A vacation home, also known as a recreational or secondary property or dwelling, is frequently located separately from the owner’s principal abode.
Because vacation houses are only utilized for a few months of the year, many owners use them as a second home or generate rental income to offset some of the ownership costs. On the other hand, some investors specialize in vacation rentals and develop real estate portfolios entirely of vacation rental properties. When purchasing a vacation investment property, it is critical to select a location that is appealing to renters—for example, on the seaside, on a lakeside, or in a popular travel destination.
Different Ways to Own Vacation Homes
1. Fractional Ownership
Fractional ownership is a frequent investment arrangement for expensive assets such as aircraft, sports automobiles, and vacation homes. Fractional ownership is a type of collaborative consumption in which the total cost of a property is divided among several owners or users. When using fractional ownership, the value of the shares in the investment rises in tandem with the asset’s value.
Typically, fractional ownership in real estate is negotiated through a property management firm, which manages the regular repair of the holiday house and food restocking. Property managers for fractional ownership holiday homes may handle a network of properties in multiple nations and locations. They might give fractional owners the option of exchanging occupancy in one other’s properties.
A fractional owner with percentage ownership in a Caribbean home, for example, could desire to spend time on the coast of France. The property manager who manages their vacation house also manages property in the chosen location. While their holiday home is rented, the fractional owner could plan to spend a week in France at the other property. It is conceivable for fractional owners to include their interest in the vacation property as part of their estate and pass it on to their heirs.
It’s More Affordable
A $5 million mansion may be out of your price range, but $1 million is exactly in your wheelhouse. You may acquire the home you want in the most coveted area at a price you can afford with fractional ownership. This also applies to home upkeep and maintenance. By sharing the costs of maintenance, fractional ownership makes long-term ownership much more feasible.
The Home Will Get Some Love
No residence should be empty for more than 48 weeks of the year. The home will be used regularly as a result of the shared ownership. Opening and closing windows and doors, running the water, using the AC and heater, and using facilities such as the hot tub and pool are necessary for home maintenance. It allows for the early detection of problems and the preservation of the home’s long-term value.
Peace of Mind
Sharing the burden of homeownership is also a benefit of fractional ownership. Instead of a single point of failure, you have a group that shares accountability, schedules maintenance, checks on the house, and divides the work and responsibilities that would otherwise be left to a single owner. However, like with any major decision, there are drawbacks to fractional ownership.
Selling Can Be a Tedious Task
Selling is not as simple for traditional fractional ownership as it is through an entire ownership arrangement. While it isn’t as difficult as selling a timeshare, you will need to spend time researching how the ownership is structured and what limits may apply to your ability to sell your share.
Reaching Consensus Can Be Tough
In fractional ownership, you must decide everything from decorating to who is authorized to use the property in your place.
When working with groups of 4 to 10 owners, this decision-making process can be time-consuming and suffocating. And when some members want to rent out their portion through holiday rentals while others do not, it can cause dissatisfaction among the group.
You’re Tied Into One Location
The majority of the time, fractional ownership is related to a single property. If you or your family enjoys diversity, this arrangement may be too restrictive. Some properties participate in an exchange program, allowing owners to exchange their nights for another location of comparable value. However, most owners find it challenging to match the area with the time of year they prefer to vacation.
Restrictions May Be Present
As with vacation rentals and any vacation properties, fractionally owned homes may be subject to HOA regulations, outright prohibited in specific areas, or subject to new types of taxation directed at properties that enable temporary usage, such as rentals.
2. Second Homes
Second homes are homes that you own that aren’t your primary residence but also aren’t considered an investment property. You must reside in a second home for at least part of the year for it to qualify as one. Also, the word “second” is a little deceptive. You can possess more than one “second residence.”
Owning a second house may appear to be something only the really rich can afford, but this isn’t always the case. When a person is unable to sell their first home, they may decide to purchase another. Others may be interested in purchasing a second house to fix up and resell—or rent out.
Two residences may be a good idea for the right person. However, if the wrong homeowner is chosen, many things can go wrong. If you’re considering taking on a second mortgage for practical or financial reasons, you should carefully consider it.
If your potential second property is in a popular rental neighborhood, you may be able to use it as another source of income. After all, you won’t be spending all of your time there if it’s a second home. You can take this chance to rent out your home and create revenue to help pay off your mortgage, or even more if you can rent on a steady basis.
Owning a second property might give you some tax benefits like owning your primary house. If you go over the $1 million debt limit by purchasing a second house, you may be able to deduct all of your loan interest.But, before you start fantasizing about the ultimate rental property that pays for itself, take a step back.
Another disadvantage is that your home will require maintenance over the course of your ownership to guarantee it preserves its value and complies with all rental rules. As the owner, you will have to pay a landlord to maintain your home, or you just might have to roll up your sleeves and do it yourself.
You may also have problems selling your home if you decide to do so. It is critical to note that even if the value of your home has increased, you will not be able to realize that gain unless you sell your home. It could take months to find the appropriate buyer.
3. Tiny Houses
Tiny houses are downsized homes that range in size from 100 to 500 square feet. They are all about simple living in a tiny space. The tiny house movement is exploding in the U.S., making it an ideal business option for aspiring vacation rental owners.
One significant advantage of tiny houses is the variety available. Before you begin this adventure, you should consider the type of home you want to have. Tiny dwellings include motor vehicles such as an RV, trailer, or camper van. If you want to get creative, you can consider refurbishing an old train carriage or a school bus no longer in service. You may even make use of a shipping container.
A little cabin in the woods, a garden shed, a cave, the possibilities are unlimited. You can choose any type of dwelling because tiny houses take up less area. Tiny homes do not have to be built on land; they can even be built on water. A houseboat or a regular boat is an excellent approach to entice people to experience life at sea.
Choose the tiny house that is best for you and your lifestyle. It’s also a good idea to check whether there’s a large demand for vacation rentals in the area where you want to start your business. Learn how to target specific sorts of tourists, such as health and wellness travelers and millennials, with your vacation rental.
Where can a tiny house be built? Well, actually, anywhere. The beautiful thing about tiny homes is that they don’t have to be in one place. They can also be transported. If your tiny house is a camper van or trailer on wheels, you may put it anywhere and move it around as much as you want. You can also include on your listing that guests can select from a variety of places to park.
Furthermore, tiny houses are attributed to being environmentally beneficial and sustainable. Water and electricity expenditures are significantly reduced because they use far less energy than a typical home. If you’re worried that you won’t fit everything in or that your tiny house will be too small, you can always build it as a two-story home.
When it comes to insurance, tiny homes can fall between mobile or manufactured homes and recreational vehicles (RVs), and there isn’t a single sort of insurance appropriate for every tiny house. Be sure to consider tiny house insurance options that are tailored to your specific needs.
4. Buying A Condo
One aspect of living in a condo is that some things are privately owned, such as your own residence. Others, such as standard amenities, are held jointly by all condominium owners. A condo can be thought of as an apartment that you own in a less technical sense. In practice, condos are typically in the shape of an apartment or another type of shared complex, such as row townhouses. Still, a condo might theoretically be in any shared building.
Condos are popular in areas with high property values, such as vacation attractions and urban areas. This is primarily due to the high cost of purchasing a single-family home in cities and towns where new development space may be limited. As a result, condos have the potential to open up homeownership to entirely new groups of individuals.
Condominiums can make it more economical to acquire a vacation home. Condos became popular in the United States as a more affordable option to own a piece of paradise in areas like Florida and Hawaii. If your goal is to relax at the beach but are put off by the prospect of purchasing a pricy house in Florida, condos provide a more affordable alternative.
A condo also has the major advantage of having someone else keep an eye on your property while you’re at work or miles away spending time at the beach. You may even be able to help pay for your vacation property by renting it out when you’re not there, depending on the laws and location.
However, there are certain disadvantages to buying a condo. For example, even if you never use your condominium’s facilities, you must still pay for them. You are also responsible for the upkeep of the grounds and any communal areas in the complex. Condominiums have HOA fees and levies to fund these costs, and these charges frequently increase year after year, which could have an effect on your long-term budget over time.
If you are the type of person who dislikes having to obey a strict set of rules for yourself or your guests, a condo community with an extensive list of restrictions for its residents may be frustrating over time. Also, selling a condo isn’t always as simple as selling a house, especially if yours has higher-than-average HOA fees or if your condo board has strict restrictions for its condo community. For example, if your complex does not allow minors or children, you might lose out on some potential buyers.
Living the Dream
Have you ever fantasized about having a beachfront home or a modest cabin in the mountains to use for vacations and rent out when you’re not there, leveraging other people’s money to offset property expenses? If you want to purchase a home for weekend getaways and lengthy vacations in every season, one of the first aspects you should think about is how to pay for that luxury, Of course, not all vacation houses are pricey.
Still, even if you find a reasonably priced second home, you must ensure that your budget can accommodate the additional monthly payments for mortgage principal and interest, property taxes, homeowner’s insurance, and any homeowner’s association dues. Don’t forget to account for routine maintenance, utility costs, and the chance of a significant repair in your budget.