How Much Can You Afford?
The first step in buying your vacation home is knowing how much you can afford; note that you may be required to put down 20 percent or more for a down payment. If you already own your primary home, CNBC notes that it might be easier to secure another property by refinancing your existing property to free up some cash for your future investment. Moreover, if you have managed to build up quite a bit of savings in a retirement savings account, then this could also help you to come up with most of the down payment amount required for your vacation rental.
There might also be other costs that you'll have to consider from an affordability point of view, including property taxes, business insurance, property management costs, etc. If you have to apply for a mortgage, the amount you could qualify for and the interest rate you will be charged will be higher with an investment property as there is usually more risk involved.
Look For Suitable Vacation Listings.
The next thing would be to look for suitable vacation listings on sites such as HomeToGo and Mashvisor in your area to see what your options are before going ahead and purchasing a vacation rental just for the sake of it. This is where it may be helpful to compare property prices in the area to see what the going rate for similar properties are so that you can get all the features you are looking for at the most competitive price.
What Will You Do with Your Vacation Rental?
If you desire to rent it out to help supplement your expenses for now, then you'll have to consider all that goes along with renting out your vacation home to tenants. You will have to forgo your own vacation needs while you work on building up capital for one day when you can retire there without any financial worries. Then there is the issue of managing the property, which you may not have the time or expertise to do. A property manager can take over this responsibility, but it will come at a cost; it will then be up to you to decide if you can afford to take on this financial risk or not.
Establishing a Business
If you plan to launch your vacation rental business, you'll need to register it accordingly. If you register your vacation rental as an LLC, then you will be given the assurance that your personal assets will be protected from litigation. There are also other benefits, such as certain tax advantages, that might end up working in your favor. If you are unsure of how to start an LLC, then you can look this up online. The News Hub points out that a formation service can assist you with this at an affordable price.
Looking ahead to purchasing a vacation rental is something that many look forward to with excitement and longing. Waiting until you're a little older, more financially savvy, and financially secure should provide an even easier pathway to achieving this dream.
This guest article was written by Abby Holt of Craftability.
-Paul R. Rossi, CFA
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