A great summer vacation often gives people the feeling that what they are missing is a dream summer house of their own.
Last year had an incredible 30% increase in vacation homes sales up to 717,000 as shown in a survey conducted by the National Association of Realtors. Yet, dreamers and buyers are usually unprepared for the high expenses and the stress that accompany ownership of a second home.
Sunny, warm days at the seaside are good for vacationers but bad for homes. People who purchase properties in coastal areas are shocked to discover that they will need new windows every six years, because of the corrosive action of wind, salt and sun. The rental income of an entire summer may be used to pay for such maintenance work. Exorbitant rates are also charged for the replacement or repairs of docks, sea walls and roofs that get damaged by storms.
Financial advisors warn that such properties don’t make a good investment for people interested in increasing revenue or for those who expect an increase in property value. In addition to maintenance and repair costs, there are other expenses with taxes, utilities and association fees that are quite high in resorts.
South Carolina is a relevant example of how property owners in this beach town pay taxes that are twice higher for non-residents than for residents. For short-term rentals, the state further slaps an additional sales tax of 7%.
Maintenance could be so harsh on the budget that it could ruin the idyllic home idea you’re picturing in your mind. Cherished vacation homes are usually full of memories, but when people want to pass the properties on to their children or grandchildren, the heirs are surprised to discover that the yearly maintenance for a $750,000 house would be $48,000 a year. This cost is definitely scary for the potential property owners.
Many clients who seek the advice of professional financial consultants have declared paying between $30,000 and $40,000 per year in interest and upkeep for a second home that they live in for a couple of weeks every year. Family reunions on Easter and Christmas are indeed very pricey at such costs. The only solution for such property owners is to sell, as renting is seldom an answer to the problem.
The costs of rental properties are also huge. People are misled by the quotes advertised for resort towns. Ads don’t mention the fact that the real estate agent could take 40% of the weekly rental income. Lots of people come to discover that renting a property is insufficient to cover the costs of maintenance and taxes. Instead, lots of such “investors” come to realize that they would be spending more money instead of making revenue.
There are other problems with rentals, as strangers into your dream house could be a source of trouble. Huge utility bills often lead home owners to desperate measures when dealing with their renters. One property owner installed a remote thermostat to get an explanation for the high utility bills only to discover that the air conditioning was set at 66, by the renter.
Financial advisors say that an investment in a vacation property is all good as long as the client doesn’t lose money. Planning ahead is the only way to make the right decision: add up the expenses of the first home with all the possible taxes, fees and costs of the second one. If the result is less than 30% of your income, then, a second home purchase is affordable.
People who have the money to spend may not feel regrets even when their dream home is not dream-like at all. A cost-benefit analysis may not always justify the purchase. The second home buyer could have a personal motivation for the purchase and may decide to carry on with his/her plan despite it being a less money-wise decision.
After spending tens of thousands of dollars on renovations and another small fortune on furnishings, it’s indeed bad for one’s nerves to discover that the toilets aren’t working; the showers flood and the bathroom sinks don’t drain. And despite this apparent disastrous investment, one may still feel good about the second home purchase…