5 Signs You’re Ready to Buy a Vacation Home

You've just returned from a trip to the beach. You ask yourself: Why should I continue to pay rental fees when I could own a vacation home and rent it out? Unless you're fairly wealthy, you'll need to make sure you can commit to buying a seasonal home before you start shopping around. 

Here are five indications that you're ready to take the plunge:

1. You can afford one
Can you afford to own a vacation home? If the answer to that question is yes, that's probably the most obvious sign that buying a seasonal home is something you should consider. You never want to buy a home that will leave you drowning in debt.

Remember, the purchase price is only part of the cost of owning a vacation home. You'll have to pay utility bills, maintenance fees and insurance premiums. And depending on where your home is located, you could also be responsible for paying homeowners association fees.

To decide whether you have enough money in the bank for a vacation home, ask yourself the following questions:

• Do you have emergency savings (at least three to six months' worth of take-home pay)?
• Can you make a 20 percent down payment?
• If you have kids, have you already put aside enough money for a college fund?
• Can you still put away enough money for retirement?
• Have you paid off your existing home?
• Have you calculated the potential return on your investment?
• Does it fit in with your long-term investment strategy and financial goals?

Everyone's situation is different. If you can answer yes to most of these questions, there's a good chance that there's room in your budget for a vacation home.

2. You've done your research
If you've done your homework, that's another good sign that you're prepared to purchase a vacation home. When you're visiting an area that might become the location of your future home, there's nothing wrong with enjoying yourself; however, doing your research and taking the time to understand what the surrounding area has to offer is important. You'll also want to make sure you visit during different parts of the year. That way, you can get a feel for what it's like to live there during different seasons.

Think about the short- and long-term implications of buying a seasonal home, especially if you plan to spend plenty of time there. When you retire, for example, the amenities included in a vacation home may take a backseat. Having access to a hospital and activities that improve your overall health and well-being may be critical.

3. You know what's happening in the market
If you can keep up with what's going on in the housing market, buying a vacation home might make sense. If you analyze changes in sales prices, you'll be able to time your home purchase carefully, and you'll be able to make the most appropriate decision based on seasonal demand, which drives home prices.

In 2016, new, single-family home sales reached their highest level in a decade, although there was a decline in home-buying activity among vacation homebuyers, according to a survey from the National Association of REALTORS® (NAR). A rising demand for housing and a shrinking supply of options has pushed up prices, making it more difficult for many people to purchase a vacation home. In 2016, the median vacation-home sales price was $200,000, up from $192,000 the previous year.

4. You have a plan
Buying a seasonal home could be worth considering if you know how you're going to use it. Maybe you view the home as an investment property that can serve as an additional source of income. Maybe you've decided that you're going to find guests online through a website like Airbnb or Vacation Rental by Owner (VRBO).

Keep in mind that if you intend to rent out a vacation home, you'll need to think about advertising and logistics. You'll need photos of your rental property and a detailed description of its amenities. You'll also need a rental agreement and a plan for how you're going to accept payments. Will you use a service like Venmo or PayPal, or ask guests to mail you a check?

You'll probably need to hire someone to clean your home and check for signs of damage and theft before new guests arrive. Hiring a property management company might make your life easier, but agencies often charge between 25 and 50 percent of your rental income.

5. You're prepared to pay taxes
Rental income must be included on both state and federal tax returns. If you are renting out your vacation home or even a portion of your vacation home (e.g., a bedroom), you might be considered an innkeeper. That means you might be expected to collect the same lodging taxes that hotels collect and make payments to your county, city and/or state. In Fort Lauderdale, Fla., for example, among tourists who pay for lodging, a 12 percent tax is due.

For many people, the decision to purchase a vacation home is serious. If you decide to take that leap of faith and you already have homeowners insurance, make sure you find out whether your current policy will cover a second home. Also, if you intend to rent out the property, consider purchasing rent loss insurance. It covers the loss of rental income following natural disasters and catastrophic incidents.