For years, Meredith Klein had been spending Thanksgiving and other vacations near the Outer Banks, in North Carolina, where her parents own a vacation home.
Last fall, she, her husband, James, and their children were sitting on the pier when one said, “Wouldn’t it be cool if we could have that house?” It was the house next door that had been rented out for 17 years. Relatives owned it.
Soon after, Meredith’s parents got a text from those relatives saying they’d made a decision. “We’ve decided it’s time to sell the house,” they wrote. They told Meredith and James about it. “We looked at each other, and said, ‘Let’s do it,’ ” Meredith recalls. “And that’s how it went.”
It turns out that Meredith, a stay-at-home mom, and James, a government contractor, had thought about buying a vacation home, and had actually saved for one. Buying a vacation home “was always sort of on the horizon for us,” she says. “We thought we wanted to do something at some point.” Yet it was a little sooner than they had planned.
With the youngest of their four children headed to college next fall, they decided they were ready. Soon, they’d have an empty nest, and more time to spend weekends in North Carolina’s Currituck County. The days of lacrosse, soccer and swimming for their four children — ranging in age from 18 to 26 — were coming to an end, and a different phase of life would begin.
“It’s like a new chapter in our lives,” Meredith says. Besides, the idea of the property staying in the family appealed to them. Her great-uncle had built the house in 1958, and “it would be nice to keep it in the family,” she says.
The Kleins are not alone. Many Americans have bought a vacation home during the pandemic for a variety of reasons. In fact, sales of vacation homes last year were up 16.3% over 2019, outpacing the total existing-home sales growth of 5.6% in 2020, according to the National Association of Realtors.
Sales growth was particularly strong in spring and summer. In the months of July through September 2020, sales of homes intended to be used for vacation climbed to 109,100, a 44% gain from the 75,600 figure during the same period in 2019, according to NAR estimates based on monthly Realtors Confidence Index Survey. Existing-home sales during the same period were up 13% year-over year.
Buying a vacation home typically requires some planning and a certain level of financial stability.
“Be in a good financial position to begin with,” says Amanda Pendleton, home trends expert with the real estate website Zillow. Even if you qualify for a second mortgage, you don’t want to be stretched too far. “It’s more than a mortgage payment.”
Other considerations include closing costs, property taxes, utilities, and, if it’s in a common-interest community, monthly charges such as homeowner’s association fees or condominium fees.
Evaluate your current and future finances before considering the purchase of a vacation home. Think about how you’re going to pay for it. Will you be able to pay all cash and avoid a mortgage? Or, with mortgage rates as low as they have been, would you prefer to finance it?
The majority of those who buy vacation homes in the Outer Banks, for example, finance the purchase and put down 20% to avoid private mortgage insurance, says Randy Nance, senior associate broker with Village Realty in Nags Head, N.C. Private mortgage insurance is typically required if you are using a conventional loan and making a down payment of less than 20% of the purchase price.
“Most finance with interest rates as low as they have been,” he says. “Some put down 30%, 40% or 50%.” Mortgage rates also depend on the “quality of the buyer,” he says. An important factor is your credit score. Houses in the Outer Banks typically range from $300,000 to $6 million, he says. “Each town has its own distinct environment.”
The Kleins paid $475,000 for the three-bedroom, three-bathroom ranch house, financing it with a loan with a mortgage rate below 3%. They put down 20%. “We had some money set aside,” Meredith says.
If you intend to use the home just for yourselves, as the Kleins do, rental income will not be a factor. However, if you decide to rent your property for 14 or fewer days of the year, you will not have to report the income on your tax return or be able to deduct any costs as rental expenses, according to the IRS.
Some people prefer to buy a second home and use rental income to offset the cost of owning it.
If you do rent out your home you may choose to have a management company handle the rentals for you. That can cost you from 20% to 35% of the yearly rental income or can be as high as 50%, depending on the location of the property. In the Outer Banks, for example, it depends on the company, the services it offers, and how much income the property can generate, Nance says.
For example, if it’s a $2 million home that generates $200,000 in income per year, it might cost just 11% to 12% to manage it, he says. A house that generates $25,000 in rental income might cost 18%.
If a rental program can generate $15,000 to $20,000 in rental income yearly, it might not be worth the wear and tear on the house to some people, Nance says. They keep it as a second home for themselves.
Some people buy a vacation home to enjoy now but may decide to turn it into a vacation rental in the future. That’s what Chris and Linda Goepper of Lawrenceburg, Ind., who bought a four-bedroom, three-bath house in Davis, W.Va., were thinking.
After their youngest child, Jason, 19, got a job there at Timberline Mountain ski resort, the Goeppers decided to purchase a home nearby. “Interest rates are as attractive as they’re going to get,” says Chris, 61, who works in industrial sales. Their purchase “was done in one day in one trip,” he says. “It’s really pretty and remote” in the Canaan Valley. “We looked at three houses, and picked the best one.”
Davis is approximately a four-hour drive from D.C. and Northern Virginia. For the Goeppers, it’s a seven-hour drive with a couple of stops along the way, Chris says.
“If you want to reconnect with your family, walk in the woods,” ski, hike or bike, Tucker County has it all,” he adds. Jason and a roommate live in the house while Chris and Linda come on weekends. “It’s a great getaway.”
Houses typically range from $350,000 to $975,000, according to Kim Landis, owner of Landis Realty in Davis. Prices were even lower — mid-to-upper $200,000s — from January to May last year. The ski resort had gone bankruptcy in 2019, and Perfect North Slopes closed on the purchase of it in late March last year. Then, during the pandemic, there was more demand for properties as buyers were looking for places to escape densely populated areas, and found real estate surrounding the ski resort appealing.
“We used to target a certain market,” Landis says. “Now, it’s varied. Young families wanting to get out of the city — second home, vacation home using it themselves or buying/investing and putting them in a rental market. Every type of customer and client. Some we’ve never seen before.”
If you’re buying a vacation home to use yourself, you’re in good company. Many people buy “to generate family memories, that’s typically what you see down here,” says Nance, of Village Realty.
For the Kleins, who closed on their vacation home in January, buying near the Outer Banks and next door to her parents was somewhat of a dream come true.
“Now we’ll have weekends,” Meredith says. “It’s something for us to look forward to, some new adventure.”
If you’re thinking of purchasing a vacation home, experts advise:
Get prequalified. If you are financing the home, get a prequalification letter from a local lender to see how much you can afford to spend. “Make sure you can afford it comfortably,” says Patty McNease, vice president, brand marketing, Homes.com.
Research the location. Know what you like, and be aware of what the areas you consider offer in terms of services and climate variation. If you prefer convenience and amenities avoid remote locations where mom-and-pop stores dominate. Consider the weather every season of the year.
Find three or four local lenders. They’ll know the area, and be likely to recommend a local appraiser. “Get three different bids on the mortgage,” McNease says. Your debt-to-income ratio, which compares your expenses each month with the amount you earn monthly, should be 43% or less. A debt-to-income ratio of 30 to 35% is more conservative, she says. “Look at your long-term expenses. Look at the total picture.”
Anticipate maintenance costs. If the home is in a common-interest community make sure the community or building has an adequate reserve fund in case weather or other emergencies incur costs such as replacing a roof.
“The best practice is for the reserves to be fully funded, that’s the ideal situation,” says Dawn Bauman, senior vice president, government and public affairs, Community Associations Institute. Reserves can be funded over time, not necessarily all at once.
Nine states require a reserve study, 11 states require that reserves be “adequately” funded, Bauman says. Thirty-three states require the association notify owners whether they are budgeting for reserves or not.
Ask the community’s association if structural maintenance is included in the reserve plan and funded because usually it’s not, Bauman says. “Usually maintenance that is unforeseen is not in the budget.”
In addition, find out how you can remain informed of community issues and concerns. “If you’re an investor, you need to ask the same questions” as if you are living there.
Consider potential rental income. Experts say you cannot necessarily count on rental income; it depends on the market. In addition, before buying, check the local rules and regulations to determine whether renting is permitted and whether there are any other requirements. For example, in the Outer Banks, “there are very few houses that have a positive cash flow” as rental properties, says Randy Nance, senior associate broker, Village Realty, Nags Head, N.C.