Vacation Homes Are the New Starter Homes for Millennials
By Brad Greiner, CEO of OpenAiRE Brokerage and Open Air Homes
For most people, living rent-free and mortgage-free is the dream, and it’s not hard to see why. Total freedom cannot be achieved when renting. And, they want to live without the fear of having their lease renewal denied or the landlord raising the rent.
The beauty of owning a house is that you’re at liberty to make any improvements. You can also redesign it so that it’s a true reflection of your dream house. The only major challenge you’re likely to face when buying a house is coming up with the down payment.
Owning a Home Is Better Than Renting
It is cheaper to buy a home in the long run.
Yes, buying a house often appears more expensive due to recurring property taxes and insurance payments, but in the end, it’s a worthwhile investment. Someday, your house could be worth much more than what you paid for it. It could also give you a passive source of income if you choose to rent it out.
Additionally, owning a home enables you to build your investment portfolio as the house is an asset. It also gives you a feeling of stability and familiarity that’s hard to achieve with rentals. And, most importantly, it’s fulfilling to have a place you can call home.
Buying a House Is Absurdly Expensive in Cities
The price of buying a house in most major cities has increased considerably. It’s no wonder millennials are having a hard time being homeowners.
The inflation in the real estate market has hit millennials hard, mainly because they are strapped for cash. This is partly because most of them have high student loans making it hard to save for the down payment of their homes.
In fact, in a recent survey, over 70% of millennials highlighted that they thought student debt was a much more significant threat to the US than North Korea. Another study highlighted that out of 4 houses listed in the market, millennials can only afford to buy one. If this trend continues, the age of first-time homebuyers will continue to get higher.
The rising home prices have also pushed millennials into moving to smaller towns, which has led to the boom of those local economies. For them, this is a viable option since most millennials have online jobs and can work from anywhere.
More young people are also setting their sights on vacation homes, and today, millennials account for 40% of vacation homebuyers. This figure is higher than that of any other generation because, in the past, vacation homes were considered “second homes.”
The Upside of Buying a Vacation House
Buying a vacation home is a strategic decision.
The homeowner can occupy one part of the house and rent out the rest to guests. They can also rent out the entire vacation house and look for a more affordable home elsewhere.
Either of these decisions is a win-win. They get to earn additional income and own a home that gives them security and stability.
After seeing the boom in the Airbnb sector, most millennials with vacation homes are choosing to turn their homes into short-term rentals. This is because they get a return on their investment in only a few years.
This approach also provides millennials with the best of both worlds as they can pay their mortgage comfortably and afford to rent elsewhere.
Remote Jobs and the Essential Role They Play in This
Remote jobs have become quite common among the younger generation. In fact, more than half of millennials are either fully remote or part-time.
Remote jobs allow them to work from anywhere because proximity to the office is not a priority. This is why most of them are choosing a change in scenery when looking for houses, and major cities don’t make the cut. To them, buying a house in the country and renting in the city makes more economic sense.
For most first-time buyers, staying in a rental while taking advantage of low-interests to buy a house is a great financial decision. So, for millennials, buying a home in a smaller town enables them to buy a bigger house at a lower cost. It is also an effective way of avoiding sky-high prices while still investing in real estate.
Mortgages for Vacation Homes
You will notice that there are fewer loans to purchase vacation homes than those available for primary residences. This is because lenders tend to have stricter requirements when financing the purchase of a vacation home.
So, interest rates are higher for vacation homes but lower than investment property loans. This means that if you plan to rent out the house throughout, you will have to use investment property loans. You’ll also need a down payment of at least 10% and a good credit score to get a vacation home loan.
There are 2 main requirements that you need to meet for your home to qualify for a conventional loan:
- The house has to be suitable for year-round use
- You need to have occupied it for some time every year
Things to Consider When Buying Your Vacation Home
Buying a vacation house as a starter home is a profitable investment, but you need to have a strategic plan. Here are the key things you should consider.
1. Consider the Pros and Cons
The pros of vacation homes are many. For starters, most vacation homes are extensive and offer homeowners more space than city homes. They also come with bigger yards and extra parking space.
Additionally, the promise of getting extra income on the side by renting out part of it is pretty alluring. On the flip side, vacation homes require upkeep and maintenance. The cost of maintenance can be quite daunting, especially the yard work and utility bills.
So, when you’re buying a fixer-upper, ensure that you have a local network of skilled people who can help; otherwise, your house will appear neglected.
2. Make a Reasonable Estimate of the Rental Income
Most buyers are too optimistic and aren’t reasonable on the amount of money they are likely to get from renting the house. It would help if you talked to a vacation rentals agency to estimate the demand for vacation homes in the area.
Keep in mind that in some areas, houses are only in demand during one season and certain areas are summer or winter destination points. So, find out all you can about the expected earnings.
The money made from renting should cover the estimated cost of managing the vacation rentals. For example, for every $100,000 earned, $1500 should be put aside to cater for repairs within the property.
3. Choose the Location Carefully
The reason for buying the second home should be clear and should influence where you choose to invest.
If the main point is to save money and get away from the chaos in the city, then a vacation home in a small town will do. However, if you’re buying vacation rentals to rent out to tourists, you should look into houses near a major tourist attraction. The area should preferably attract visitors during all or most seasons.
Your home is an investment, and you should view it as such. So, when you’re buying a vacation home, you should also consider the projected growth rate of the area and the health of the local economy. Your return on investment depends on it.
4. Go For a House That Is Under Your Budget
Most of the time, buying a home away from a major city helps you save on costs. So, avoid buying vacation homes if you have to stretch your budget to accommodate them.
Go for a house under your budget as this will leave you with adequate money to furnish the home, manage it and hire someone to keep it in great condition.
5. Consider Whether You Will Be Using the Residence Regularly
How often you use your vacation home is an essential factor in deciding the loan you qualify for and the tax implications.
If you plan on using the vacation home as your primary residence, standard loan options apply. If, on the other hand, you plan on using it as a rental, the loan options are different.
6. Don’t Be In a Rush
Peer pressure, especially from social media, is one of the main driving factors in convincing millennials to buy a house. Unfortunately, most tend to get caught up in the moment and ultimately end up making the wrong financial decisions.
Don’t get influenced into buying a vacation home — Slow down and take your time. Ensure you do your homework before making a purchase.
Get a real estate agent to help you make an informed decision and only buy a house after running the numbers. Buying a vacation house without adequate information could end up being a regrettable mistake.
Renting Out Your Vacation Home
Renting out your vacation home when you’re not using it or renting part of it is a great way of earning additional income. This extra money can even help offset the mortgage.
You should, however, note that finding good renters may be a challenge, especially if you live in a different area. This is why you should consider enlisting the help of property management company like Open Air Homes to help manage your home.
The role of these agencies includes finding rental clients, vetting potential renters, processing their applications, arranging for cleaning and repairs— simply put, they look out for your best interests at a small fee. They ultimately prevent you from making mistakes as a renter.
Mistakes Made When Renting Out a Vacation House
If you intend to rent out your vacation home, there are some common mistakes you should avoid:
1. Not Knowing the Local Laws
Different regions have varying laws regulating short-term rentals. For instance, if the property belongs to an association, short-term renting may be restricted.
These laws should be a focal point in your market research if you intend to rent out your house on a short-term basis. A real estate agent, preferably one who understands the local laws, can help you know and understand them.
2. Overlooking Tax Implications
Don’t assume that you know the tax implications of renting your vacation home. You must pay income taxes on the income you receive.
There’s also a chance that your property taxes will be higher because the house is in a vacation residence. So, go for an excellent real estate agent. They will come in handy in providing you with details about the taxes in the area.
3. Not Having Adequate Insurance
Many homeowners only get the insurance that covers residential homes without realizing that this does not cover short-term rentals.
Ensure that the insurance cover for your home also covers the damages that renters cause. Otherwise, you’ll be left exposed, especially if the damaged items are expensive.
4. Not Being a Good Host
Being a good host is relative. However, your guests should feel welcome when renting a part of your house. Ensure that you have good customer service skills to accumulate high online ratings. This will help you get return clients, increasing your steady flow of income.
Ensure that your home has a welcoming appeal. You should also keep it clean and in good condition.
5. Ignoring the Neighborhood Dynamics
Some neighborhoods have strict rental laws, and some permanent residents may have an issue with the constant flow of strangers.
The best way to mitigate this issue is by talking with your neighbors and city officials beforehand and assuring them that the renters have been vetted. You can also enforce rules for the renters to avoid disrupting the neighborhood.
Are Vacation Homes the Future of Real Estate?
When buying vacation homes, consider getting one that suits your needs. Be realistic about the expected return on investment and deliberate about how you intend to use the home. For instance, if you want to rent out part of the house while still living in it, a duplex may be the perfect choice for you. You should also consider buying in a tourist-friendly spot that will make you enough money to offset your loans.