7 Things to Consider Before Investing in a Vacation Property in 2023
With the right planning and diligence, owning a vacation property can be a rewarding and fulfilling experience.
It’s a familiar feeling: returning from vacation and wishing you could have stayed longer. For some people, this feeling is so powerful that it leads to an investment in a vacation property. If this sounds like something you’d like to do, here are seven things to consider before investing in a vacation property.
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1. How you’ll use the property
Are you dreaming of a home away from home that your family can escape to whenever you have a spare moment? Or is your goal more long-term, buying a property as an investment but with hopes of retiring in your rental income-financed vacation home?
Whether you want to limit your vacation property for your exclusive use or generate rental income influences the type of property you’ll want to buy.
2. Cliched but true: location, location, location
If location is important when it comes to your primary home, it’s doubly important when investing in a vacation home. This is a critical consideration no matter how you decide to use this property.
When researching locations, prospective buyers should consider:
- Proximity to popular attractions
- Surrounding environment (e.g., in the middle of the mountains or close to water)
Additionally, think about the local real estate market, including property values, historical price trends and future growth prospects.
3. Local regulations and restrictions
Even prior to 2023, many cities and localities added substantial taxes and imposed regulations on short-, long- and medium-term rentals. Before purchasing a vacation property, you’ll need to make sure local restrictions allow for whatever type of use you are planning for your vacation property.
These regulations and restrictions may also include things like:
- Zoning laws
- Building codes
- Homeowners Association (HOA) rules
Violating these regulations can result in fines or legal action, so it is crucial to understand the limitations and requirements associated with owning a vacation property in a specific location.
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4. The actual cost of owning a second home
As with owning a primary residence, investing in a vacation property will end up costing much more than the listed sale price. From closing costs to regular maintenance, there are hidden expenses everywhere.
Pay attention to the total cost of ownership, which includes not only the actual cost of buying an investment property but also:
- Mortgage payments and interest
- Property taxes
- HOA fees
- Furnishings and decorations
- Lawn care/snow removal
Finally, you’ll also need to consider the tax implications of owning a vacation property. Although you may be able to deduct mortgage interest and property taxes, rental fees are considered income and need to be claimed when filing your taxes. This could bump up your tax bill.
5. The timing of your purchase
There is still plenty of volatility in real estate in 2023, with interest rates softening somewhat but still north of 5%. If you’ve long been considering purchasing a vacation property, consider whether now is the best time — or if waiting one more season might be a better choice.
And when it comes to seasons, make sure you’re buying at the right time of year. Summer is typically a hot market for vacation homes, but in areas where winter sports rule, fall might work well, too. In this “shoulder season” of home buying, there tend to be fewer prospective buyers, which means it’s possible to get a great deal.
6. How often you’ll use the property
After returning from a vacation, it’s easy to get swept up in dreams of buying a property in the area. Many people have fallen prey to this feeling. After scanning online listings, they rush into buying a property — only to find that they don’t visit it enough to make it a financially responsible investment.
Before you take the leap and purchase a vacation property in 2023, consider how often you will actually visit and whether it’s worth the cost of ownership, especially if you are not planning on renting it out when you’re away.
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7. Who manages your rental
If you’ve committed to purchasing a vacation property and want to rent it out, think about who is going to manage locating, accommodating and cleaning up after tenants. Will you join a rental platform like VRBO or Airbnb, or will you advertise on other less popular platforms?
If you do rent your vacation home on an established third-party site, you’ll still need to clean after each tenant, manage payments and dedicate some time during tax season to make sure you’re following the law. And if you don’t have time for this? Add an experienced property manager — and extra hours for your accountant — to the budget.
Is investing in a vacation property in 2023 right for you?
Investing in a vacation property is a complex decision that requires careful consideration. Don’t leap before you look. Take the time to plan and consider your goals, budget and intended use first. With the right planning and diligence, owning a vacation property can be a rewarding and fulfilling experience.
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.