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5 questions to ask before buying a vacation home

What we'll cover

  • Whether buying a vacation home is right for you

  • The tax implications of buying a vacation home 

  • How to get started with buying a vacation home  

Forget cruises, road trips, or multi-destination vacations — there’s only one getaway spot your heart yearns for: a second home. Whether you’ve been visiting the same special place for years and years or you can’t get last summer’s vacay off your mind, buying a vacation home could be an investment worth considering.

Owning a vacation home means you can upgrade your  staycation and skip paying for hotels and/or vacation property rental fees. Plus, you can customize your home to make it your own and enjoy more privacy than you might in a hotel or an Airbnb. Another perk? When you're not staying in your vacation home, you could rent it out to others who appreciate a getaway like you do (and generate extra income). And if you decide you'd like to retire to your favorite vacation destination, you'll have a home already waiting for you.

But don’t start picking out your nautical décor or cabin-chic bedding just yet. There are a few things to ask first to make sure that buying a vacation home is right for you.

1. Can you afford buying a vacation home?

Before venturing into vacation home ownership, you first need to figure out if it's going to fit into your budget.

Vacation homes have many of the same costs as a principal residence, starting with a mortgage. Getting a mortgage for a vacation property is a little different than getting a loan for a home you plan to live in full-time. Your lender may expect a larger down payment, for instance, or you may be looking at a higher mortgage interest rate , depending on your credit score. And in addition to a down payment, you’ll also be responsible for closing costs, which can run from 2% to 5% of the purchase price.

You will likely also have to pay for:

  • Homeowners’ insurance

  • Property taxes

  • Utilities

  • Maintenance and upkeep

  • HOA fees (if required by the neighborhood)

  • Flood insurance (depending on the home’s location)

  • Furnishings

  • Property manager (if you’re renting out your residence)

All of those costs can add up when buying a vacation home, particularly if you already own a primary residence. So it's important to look at your full financial picture before making a purchase.

2. Where's the best place to buy a vacation home?

Real estate is all about location, location, location — and that's especially true when it comes to vacation homes. Where you choose to buy one matters from a cost perspective and is particularly important if the area has higher property taxes or homeowners' insurance rates. But there are also other considerations to keep in mind.

If you want to use a vacation home to generate rental income, for example, you want to look for a property in an area that gets consistent tourism traffic. Otherwise, you may struggle to keep it occupied. Leaving you on the hook to make your entire monthly mortgage payment (if you have one).

Pro tip: Connect with a real estate agent in the area where you're thinking of buying a vacation home, to get a feel for what the rental market is like.

Something else to consider is how likely your vacation spot is to be impacted by extreme weather events. A coastal home, for example, may be more prone to hurricanes, which could increase the risk of property damages versus a home that's further inland.

Homeowners' insurance may cover some natural disaster-related damages but only after you've paid your premiums. In areas where storms, flooding, earthquakes, and other natural disasters are more prevalent, or if you have waterfront property, you may need additional coverage beyond your standard insurance to account for those risks — and that can be costly. Plus, keep in mind extensive damage could prevent you from using the property or renting it out temporarily.

Finally, think about what kind of vacation home best fits your lifestyle, needs and preferences. A beachfront home with a pool, for example, could be a great fit if you want a warm weather escape. But if you'd prefer a cooler place to spend the summers or a snowy retreat for winter, a cabin in the mountains might be the better choice.

3. What are the tax implications of buying a vacation home?

Before buying a vacation home, it’s important to know which tax breaks you might qualify for and what bills you will be responsible for.

For instance, the IRS allows you to deduct property tax payments for a second home. But the limit for all state and local tax deductions, including property taxes, is set at $10,000 per year if you’re single or married and filing jointly. Mortgage interest on a vacation home is also tax-deductible. If you are single or married and filing jointly, then you’re limited to deducting mortgage interest on $750,000 in qualified debt, including vacation homes and your principal residence.

If you want to turn your second home into a vacation rental, there’s also tax implications to keep in mind. When renting your residence for 14 or fewer days during the year, rental income is tax-free. And you still get all the standard tax deductions that you would with a primary residence.

But if you rent the home out for more than 14 days during the year, rental income must be reported to the IRS. Plus, you wouldn’t be able to deduct mortgage interest or property tax payments. The upside? You can deduct rental expenses, including hiring a property manager and costs you pay toward maintenance and upkeep.

Talking to an accountant or tax professional before buying a vacation home can be helpful to better understand the tax consequences of owning an investment property. That way, you won’t be hit with a surprise tax bill by using your vacation home to bring in some rental income.

4. Is buying a timeshare a better option?

Timeshares allow you to have the use of a vacation home part-time with fractional ownership. While this might sound like a good idea, there are some downsides, starting with cost.

Owning a timeshare typically means paying an upfront fee to buy into a vacation property. But you’ll also be responsible for annual fees, as well as utilities and maintenance costs. If you only have limited access to the property during the year, you may not get your money’s worth from the investment.

Buying a vacation home, on the other hand, can be more cost-efficient and you’re not restricted on when or how you can use the property. If you decide to skip your vacation, you could use the money you saved for it to make improvements or upgrades to  increase the property’s value .

And perhaps most importantly, you can reap the benefits of appreciation if you decide to sell your vacation home for a sizable profit down the line. If you’re looking for an alternative investment to round out your portfolio, a vacation home could fit the bill.

5. How do I get started with buying a vacation home?

If you’re ready to start shopping for vacation homes, the first step may be finding a reputable real estate agent to work with. A good real estate broker who knows the area you want to buy a vacation property in can help you find the right home for your needs and budget. And they can also offer advice on making the home into a vacation rental if that’s something you’re interested in.

The next step is finding a lender, like  Ally Home , to work with to help you find the right mortgage option for buying a vacation home. And don’t forget to try out our  mortgage payment calculator  to estimate how much your monthly loan payments will be.

Especially as mortgage interest rates are near historic lows, now could be a great time to explore the possibility of a second property. If you’re ready to turn your beloved getaway destination into your home away from home, buying a vacation residence could be an investment you’ll cherish for years to come.

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