From what I read in the news about skyrocketing property prices for houses and especially vacation properties, I'm not alone in my desire to buy weekend home. Last week I was talking with a friend of mine in Florida and expected that things would be quiet since fewer people than normal were traveling this year. Instead, she told me that their community was actually busier than ever because every beach house had been secured as long term rentals by people fleeing the cities, especially from New York, Philadelphia, and Chicago. This got me thinking about all the different things you'd need to consider before making a jump from renting to actually buying a beach house as your weekend home. Let's take a look.
What Can You Afford?
Perhaps the biggest question when you first consider buying a beach house is what you can afford. While there are tools like those over at mortgagecalculators.info that help you consider your financial ability to carry a mortgage (or a second mortgage) there are other questions to consider as well. While they do a great job of listing out all the different kinds of payments and expenses you might have, buying the house is just the start.
Tax and Mortgage Implications of Buying a Beach House As a Weekend Home
While you might not consider it to be any different, governments consider a Second Home very differently than an Investment Property. The key difference should be obvious here that a second home is one that you purchase to live in ... even if only on weekends. Some lenders will even approve mortgages differently based on how you plan to use the property. For tax purposes though, a Second Home is one that you live in for at least part of the year and is rented out to others for fewer than 180 days per year.
On the other hand, an investment property is one that you will need to purchase with the primary intent of generating rental income.
The difference may seem irrelevant but most mortgage rates will be higher for investment properties. This is in part since many buyers factor the rental income into their ability to pay the mortgage and as with any business, there are many risks involved. Additionally, people who are purchasing a second home to live in will tend to be less of a risk since they actually live in the property and so far less likely to just walk away from it.
There are other factors involved as well that you need to consider in terms of downpayment as well as qualifying factors.
When it comes to taxes, there are many other differences in terms of being able to include any rental income (if rented fewer than 14 days) from a second home, but with investment properties, you will need to separate the income and prepare a balance sheet the way you would for any business. There are also differences when it comes to how interest on mortgage debt can be deducted as well.
These are just some factors to consider. Ultimately you should talk with your financial planner before making the decision on whether you are buying your beach house as an investment property or a second home since this will make a huge difference when it comes to your finances.
What Are The "Other" Expenses?
Paying for your new beach house is just the beginning. Now you have to consider other financial expenses you will need to prepare for. One of the big issues with beach houses is that depending on where you live you may be susceptible to flooding or hurricane damage. This might not be something you are familiar with if your primary house is in an area far from the water. While many mortgage companies will insist on you purchasing flood insurance or hurricane insurance in addition to homeowners insurance, some may not. You don't want to cheap out here since generally speaking while your homeowners insurance policy might cover water damage from broken pipes or a hole in the roof, a storm surge that floods the house is likely not included.
Beyond flood or hurricane insurance, other expenses to consider would include decorating your new beach home, transportation to and from the property, and items such as TV's appliances, and utilities that you will now need to have at each property. While these are small expenses individually they will add up as you start to consider all the items you need to buy.
Is Your Beach House An Investment Or Simply A Luxury?
We've covered the idea of treating your new beach house as an investment property or a second home already. However, when it comes to shopping for that perfect beach house as a weekend home, you will need to consider appreciation potential. While some properties make money on a monthly basis, others will appreciate in value faster than others. For instance, you might find a condo in a desireable neighborhood to be "less you" than that older house at the end of a beach road. You need to do what you feel is best for yourself but at the same time, considering a property that will increase more quickly in value will allow you to purchase a larger one in the future.
However, if you just simply want a weekend beach house as a place to escape then, you do you and pick the one that feels most like "home".
Is The Community One You Want To Join, Or Just Visit?
Finally, take a moment to examine the community and get to meet locals. There are some destinations with a beautiful beach and clean water but maybe not the type of community that you really want to be part of. If your purpose is solely to escape the city on weekends and head to your beach house and look out at the water ... that's fine. However, if you are seeking a second home that may one day become your primary residence then having a community that you enjoy will be VERY important.