Buying Vacation Property
September 20, 2009 by admin
Filed under Mortgage Loans
A great way to invest your money is buying vacation property. You can usually find properties that can be purchased and rented for small blocks of time to vacationers. Most people who invest in real estate are looking to make a profit. You will want to see a return on your investment as the value of the property in question begins to increase over time so that you can make a tidy profit when you decide to sell it. But, if you decide to purchase a vacation property (like a lake side cottage) you will want to be primarily concerned with focusing on bringing in rent and maintaining the property. You will need to look at a rental vacation property as a long term investment, because–regardless of when you decide to sell it–you want to make sure it can generate a steady income while you own it. There are risks that you need to be aware of when you purchase another home.
There are risks that you need to keep in mind when you decide to purchase a vacation rental; even though this is a far safer investment when compared to speculative real estate. Vacation rental properties are not exempt from typical market and liquidation issues that all real estate ventures are subject to. For instance, the area you have purchased the property in may no longer be popular and the property values can drop significantly because of this. An economic downturn may mean that more people stay home and fewer people are looking to rent during peak vacation periods. Tax law alterations could also mean that you are being charged more in taxes for your rental property. If you yourself discover that you are in desperate need of cash you may find it difficult to liquidate your rental property. You should always carefully evaluate the risks before taking on a second home like a vacation rental property.
Positive Aspects
There is a plethora of areas and different types of property you can chose from when you start shopping for a vacation rental. You can decide to purchase a cabin in the woods, a lake front property, a ski chalet in Vermont, a townhouse in Montreal, or a condo in Miami to name a few. You may very well decide that you would like to purchase a property near you so that you can maintain it easily and use it yourself. It may be your dream spot for quiet time with your family. Regardless of where you decide to purchase a property, you will find yourself with endless options for properties that can be vacation rental investments.
2) Rental properties and favorable taxes
You will find that rental properties, under the tax code, are perceived as business properties. If the vacation property is only ever rented out (and this is its primary use) you will discover that it will be given far more favorable treatment under the tax code because the following are all deductible: advertising, maintenance, insurance, property taxes, mortgage interests, and other related expenses. If you decide that the property will be rented when you are not using it, then it will be subject to different taxes. If the property value drops then you can deduct that too.
3) Capital gain potential and your current income
You initial returns for your vacation rental property will be the rent payments that are paid to you by vacationers for the use of your property. Rental properties also can generate capital gains because, if the value increases, you can sell your rental for a profit when you no longer want the rental property. Rental property investments are different from other real estate investments because they can glean income each year rather than just capital gains.
Give-and-Take
1) It is not a liquid investment
You will not be able to unload your rental property quickly for cash and you never know for certain how much money a property will bring in when you decide to sell it (if you want to sell it quick a buyer may very well give you a low offer). You should always make sure that your financial investments are well balanced with other portfolio items like short-term securities, bonds, and stocks.
2) Remember that real estate as an investment is speculative in nature
Real estate investments do not come with a guarantee that you will ever see a profit. The property you purchase could very well decrease in value over time regardless of any improvements you make. There are factors outside your control that can ultimately determine the failure or success of an investment.
3) You will have to be diligent and maintain your vacation property.
You cannot just purpose a vacation property and be done with it. Prior to buying a vacation rental property, think about how you can maintain and service it and how you will deal with tenant complaints. Your profits will be lessened by any maintenance that you might need to pay for.
4) An area’s popularity will greatly affect the value of the property, how easy it is to find tenants and your rental income.
You will need to make sure that the rental property is consistently occupied–if the property is empty you are not generating any income and your income depends on renters. You will never be able to guess if an area will remain popular as a vacation spot and you can only use your best judgment. If an area is no longer in demand, this can affect your property values which can ultimately hurt your bottom line when you put the property on the market.
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