Should You Think of a Vacation Home Rental As an Investment

If you've been thinking about buying a vacation home rental but are having trouble rationalizing it, try thinking of a vacation home as an investment instead. Considering the decision from this angle, buying a vacation home may make a lot more financial sense, depending on your situation.

When you consider the vacation home as an investment, think about the fact that you're building equity in a property when you purchase a vacation home, just as with the purchase of a primary residence. You might be able to sell a vacation home and use the proceeds to purchase a bigger primary residence, a new vacation home or even put your kids through college. The question isn't should you think of a vacation home as an investment, but why shouldn't you?

Potential Tax Benefits and Income
Like the purchase of a primary residence, purchasing a vacation home provides tax benefits. The property taxes and interest that you pay on your vacation home are tax-deductible, just like what you spend on a primary residence.

If you don't live in your vacation home year-round, you can also rent it out to tenants during the off-season, or even during peak vacation season when you won't be there. The income from renting vacation homes can help to offset the costs of the mortgage and other expenses.

The Disadvantages of a Vacation Home
The disadvantage to having a vacation home as an investment is that you don't live there year-round; therefore, the costs of carrying vacation homes are disproportionally higher than that of primary residences. For example, you must factor in the cost of insurance and utilities at the vacation home, even when you aren't there. You may need to keep utilities on year-round in cold climates to avoid damage to interior systems. You should keep vacation homes insured no matter what, in case anything should happen to the building or the property itself.

Evaluating the Debt-to-Income Ratio
Another disadvantage of having vacation homes as investments is that the carrying cost is figured into your debt-to-income ratio. If you have two mortgages, that affects your creditworthiness for the sake of establishing new credit or refinancing an existing mortgage. You may not be able to qualify for a new mortgage on your primary residence if you also have vacation homes, because your debt may be too high compared to your income. Consider these aspects of owning a vacation home as an investment before you make the leap.

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