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Guide to Buying a Vacation Home

Buying a Vacation Home? Then Don’t Forget This Crucial Step

December 18, 2019

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Buying a vacation home is a fantasy for many, but let’s get real: Such a purchase should not be attempted without the proper safeguards—starting with insurance.

In this latest installment of our Guide to Buying a Vacation Home, we highlight everything you need to know about vacation home insurance.

For starters, lenders require insurance on all homes that have a mortgage, and a vacation home is no exception. But the type of policy and amount of coverage you need depend on how your place will be used.

Vacation homes need separate homeowners policies

When your vacation home is solely for personal use, a standard homeowners insurance policy will suffice. If you already have homeowners insurance on a primary residence, you’ll need a separate policy for your vacation home, says Ben Mellino, senior assistant vice president of sales and client services at Amica Mutual Insurance Co.

The policy for a vacation home would be “specific to the different coverage needs” of the home, he says.

Homeowners insurance covers damage or loss of a home and its contents, as well as liability if there’s an accident on the property. Policies average about $1,200 annually, according to the National Association of Insurance Commissioners.

The good news: Many insurance companies let homeowners bundle policies and offer a “multipolicy discount, but each property will be covered under a different insurance policy contract,” says Lynne McChristian, media spokesperson and nonresident scholar at the Insurance Information Institute.

To determine coverage and rate, insurers take into account the home’s location and its risk factors (e.g., a beach home in a hurricane zone or cabin in the woods at risk for wildfires). Insurers also consider the type and age of the home, and amenities (e.g., a pool) that could increase any risks for owners.

Renting out your vacation home? You need a different policy

If owners decide to rent out the vacation home for short-term stays (e.g., Airbnb), it increases liability for owners, Mellino explains.

This is outside the scope of a standard homeowners policy, which is designed for owner-occupied properties, and the exact type of policy that’s needed for a short-term rental gets complicated because of the increased risk involved.

Several scenarios could apply:

  • Some insurance companies allow a homeowners policy to extend to a short-term rental on certain one-off cases if the company is notified.
  • Some insurance companies require a rider, or additional benefit, to the existing policy to cover a short-term rental.
  • Some consider a short-term rental a business, which would not be covered by a standard homeowners policy and would require a commercial policy.

Vacation home owners need to disclose to their insurance company how often they plan to rent out the home and whether they will be at the home while it’s being rented out. Insurance companies may require a commercial policy, similar to what a bed-and-breakfast would have, for homes rented out for several short-term stays in a month.

Commercial policies are pricey, with annual premiums costing as much as $5,000 per year. They cover damage to the property, liability, and workers compensation.

Some companies offer on-demand coverage expressly for short-term rental properties and home shares, like a vacation home rented on Airbnb. For example, one such company, Slice, offers policies that include $2 million in commercial liability, full replacement cost of the home and its contents, and additional coverage for vandalism and other instances, for around $7 per night and up.

Vacation booking sites offer some insurance coverage

Certain short-term rental platforms offer some insurance coverage.

Airbnb, for example, provides listings with liability insurance of up to $1 million to “protect homeowners against third-party claims for personal injury or property damage,” according to the company’s site.

The policies are limited to certain kinds of liability, however, and don’t cover damage or injury caused by pollution, mold, an intentional act, or loss of earnings.

Another caveat: Policies apply only during a guest’s stay. So, homeowners should view it as an additional layer of coverage and purchase a primary policy to ensure that the home is protected all the time, Mellino says.

Renting it out for the long term? Get a landlord policy

Sometimes, vacation home owners decide to turn their property into a long-term rental.

Landlord policies are typically designed for such rentals, McChristian says. These policies protect the home’s structure and cover the owner in case someone gets injured on the property. Some also cover damage caused by tenants, rent default, and loss of income.

Landlord insurance can be up to 30% higher than standard homeowners insurance.

Different insurance companies offer different kinds of coverage, so McChristian urges homeowners to shop around to get the best price and the most complete coverage.

Adding an umbrella policy is a smart move

No matter how you plan to use your vacation home—as a personal getaway or rental to make money—Mellino and McChristian urge homeowners to consider adding umbrella policies for additional protection.

An umbrella policy offers extra liability coverage, and could be a worthwhile investment to protect homeowners from the additional risk that a vacation home brings (e.g., a home with a pool, or a home located in a flood-prone area).

“The additional exposure may mean a higher likelihood for a loss, so the more protection you have, the more peace of mind you’ll have in the event of a loss,” Mellino says.

An umbrella policy adding $1 million liability protection beyond the primary policy on the home averages $200 to $300 per year.

Other weather-related policies that you may need for your vacation home include the following:

  • Flood insurance, which averages about $700 annually, according to FEMA.
  • Earthquake coverage, which can cost $100 to $800, depending on location, according to USAA.
  • Windstorm or hurricane insurance averages about $400 per year.

“Insurance is about protecting your finances, and you’ll want to give yourself the peace of mind that comes from knowing your vacation home can be enjoyed for years to come,” McChristian says.

The post Buying a Vacation Home? Then Don’t Forget This Crucial Step appeared first on Real Estate News & Insights | realtor.com®.

How to Get a Mortgage on a Vacation Home: It’s a Whole Different Game

December 16, 2019

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You’ve spied a cozy bungalow for sale in your favorite beach town, and it hits you—wouldn’t it be great to purchase this oasis yourself? Yet before you get ready to make an offer, consider this: A mortgage on a vacation home works light years differently than a loan for a primary run-of-the-mill residence.

So before you head down this enticing path of purchasing a home away from home, check out this latest installment of our Guide to Buying a Vacation Home. Here, we highlight everything you need to know on the mortgage front so you can sail through the process and into your own personal retreat without a hitch.

Why vacation home mortgages may incur higher costs

Mortgages on vacation homes often require higher down payments and may have higher interest rates and property taxes, depending on the location. Why? Because financing a vacation home requires mortgage lenders to take on more risk than they would with a regular home in a variety of ways, says Steve Darnell, first vice president of sales at Flagstar Bank.

For one, vacation homes are often vacant, or rented out to tourists who may have less of an interest in maintaining the place in pristine condition.

“Occupied properties are considered less risky than rental properties, where no one is on-site with a vested interest in caring for the property,” Darnell explains.

If the buyer of a vacation home also has a mortgage on a primary residence, this poses another type of risk that the buyer’s finances might be stretched too thin over two mortgages.

“It might be fine in good times,” Darnell says, “but challenging for the homeowner to keep up with payments in a down economy.”

The location of a vacation home could pose yet another liability. Many popular vacation spots are susceptible to natural disasters, like hurricanes and flooding. Even with insurance, Darnell says, “lenders can face losses.”

All this risk means home buyers may have to pay a little more for their vacation homes in the form of a higher down payment, higher interest rates, and higher insurance premiums.

How much is a down payment on a vacation home?

While it varies by lender, according to Darnell, conventional mortgage programs that might typically need only 3% down on a primary residence will require a minimum of 10% down on a vacation home. If you plan to rent out the home rather than enjoy it yourself, that down payment could go up to 15%. In addition to having a higher down payment, mortgage interest rates on vacation homes could also be higher.

Also, not all mortgage products that are available for buying a primary residence are available for a vacation home purchase. For example, FHA and VA loans can’t be used to buy a vacation home, says Sherry Graziano, senior vice president and mortgage transformation officer at SunTrust Bank.

Why you must disclose how the vacation home will be used

“When a homeowner wants to purchase a vacation home, they must declare how they intend on using it at the time of application,” Graziano adds.

There are a few ways a vacation home can be classified:

  • Primary residence, where the homeowner lives most of the year
  • Secondary residence, which is rented out for no more than 180 days a year
  • Investment property, which is used strictly as a rental to generate income

If the occupancy type changes from the terms of the initial mortgage, homeowners should consider contacting their lender, since the home may need to be refinanced to change the mortgage terms to match its new purpose.

While refinancing a vacation home may seem like a pain, in many cases the change could be beneficial. For example, Graziano says, if a vacation home was initially purchased to be used as a rental property but the owner later decides to make it the primary residence, refinancing could bring a lower interest rate, and  may qualify for a different loan product (like an FHA or VA loan).

Your property tax and insurance bills could be higher

Vacation homes may also come with a higher property tax bill than a primary residence, Darnell says. He urges home buyers to make sure they understand the tax rates, which vary by state and locality, especially if they’re buying a home in a different state that they may not be as familiar with.

Along with different tax rates, there could be different rules and laws for real estate fees and expenses, Graziano says.

Closing costs, usually 2% to 7% of the home’s purchase price, also vary, and some states have higher transfer taxes, the fee for passing a property title from one person to another.

Homeowners insurance could also be as much as 20% higher on a vacation home, especially if it is rented out.

Mortgage pre-approval for a vacation home

Due to these higher costs, experts recommend that vacation-home buyers get pre-approved for a mortgage. That’s where loan advisers review a home buyer’s loan application, which includes the individual’s income, assets, credit, and liabilities to recommend the best-suited mortgage product.

“It is always best to have a mortgage pre-approval in hand before you sign a purchase agreement,” Darnell says. “That puts you in a better bargaining position in bidding on a home.”

He suggests checking with multiple lenders to ensure that you’re being offered a competitive rate and loan terms.

On top of the monthly mortgage payment, taxes, and insurance, Graziano says vacation-home owners need to budget for the big picture, and factor in operating costs, maintenance, repairs, utilities, and “any ancillary services for sustainable homeownership.” She says these costs are sometimes overlooked.

“Purchasing a vacation home can be exciting, but it’s important that homeowners are financially confident and have budgeted for all related expenses,” she says.

The post How to Get a Mortgage on a Vacation Home: It’s a Whole Different Game appeared first on Real Estate News & Insights | realtor.com®.

Are You Ready to Buy a Vacation Home? 6 Questions to Ask First

December 4, 2019

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Whether it’s a bungalow by the beach or a cabin in the woods, owning a vacation home is a dream for many. After all, you’d always have a place to stay in a favorite travel destination, and could rent out the place when you’re not using it. What’s not to love?

Yet all too often, people venture into a vacation home purchase with “rose-colored glasses on,” says Denise Supplee, real estate investment educator and co-founder of property management software SparkRental.

Vacation homes can be a worthy investment, but owners don’t always fully realize the time and financial commitment involved.

As Supplee describes it, “Here is a typical scenario: New to property investing. Looks at the romanticism of a home by the ocean or one tucked away in the mountains. Assumes they’ll make a fortune.”

In reality, “there is substantial risk,” she says. “That’s especially true when a vacation home is used as a short-term rental, which can bring extra costs.”

Dealing with vacancies and attracting bookings can be time-consuming, too.

All of this begs the question: Are you truly ready to buy a vacation home?

For answers, look no further than our Guide to Buying a Vacation Home, a new weekly series. For this first installment, we pinpointed the key questions you should ask yourself to gauge just how prepared you are to take the plunge. By talking with experts and people who own (and rent out) their vacation homes, you’ll learn what’s involved in this endeavor, and the risks. That way, you can enter this adventure with your eyes wide open and, yes, maybe even make a profit!

1. Why do you really want a vacation home?

So before looking for a vacation home to purchase, first consider your reasons and goals for wanting one. How much do you plan to use it personally, and what will you do with the home the rest of the time?

According to Steve Schwab, founder and CEO of Casago, a vacation rental and property management platform, common reasons people purchase vacation homes include the following:

  • They have a place to stay in a favorite travel spot.
  • They have an eventual retirement home.
  • They establish a way to make money by renting the home out.
  • They have the home as an investment that they can rent out now to cover the mortgage and property taxes, and later sell for a profit.

Just keep in mind that some of these goals might clash and be hard to juggle.

Avery Carl, a real estate agent and owner of five vacation rental properties in Tennessee, cautions against getting too emotionally attached when purchasing a vacation home as an investment.

“If there are any personal emotions tied to an investment property, the owner will never maximize its cash flow potential, and owners will end up getting upset over minor issues like makeup on towels,” says Carl, who works with investors to acquire their own vacation rentals.

“My advice is not to rent it out if it’s a personal vacation home that you have an attachment to, and if it’s an investment, keep your emotions separate—it’s a business.”

2. Do you have time to manage a vacation home?

Many homeowners underestimate the time and work involved in owning a vacation home, Supplee says. The time commitment includes marketing the home, setting up listings on travel booking sites, keeping up maintenance, dealing with guests checking in and out, and handling guest requests.

“Some people buy a vacation home and find that they didn’t buy a vacation, they bought a job,” Schwab says.

Schwab says VRBO estimates that homeowners spend about seven hours a week managing a vacation home. However, it could be less: Carl, who manages five properties, says she spends about an hour and a half per week on each.

Additionally, self-managing a property means being on call 24/7 in case renters have any questions or problems from broken air conditioning to nonworking Wi-Fi.

3. Will you self-manage the rental, or hire help?

Some vacation home owners may enjoy handling the management process themselves. For others, especially if they live some distance away, hiring a property manager can be well worth the expense.

Schwab suggests owners tally up how many hours a week they spend managing their vacation home and divide the hours by a property manager’s fee. That can help homeowners determine whether a management service is worth the cost.

Even if you don’t plan to rent out the home to vacationers, hiring a property manager to keep an eye on the home when you’re not there is a good idea, especially if you live far away. This will ensure that the home stays clean and in good repair.

4. Do you want short- or long-term renters?

While renting out your place on Airbnb or VRBO might be the most lucrative option, it does have its downsides, including higher cleaning fees, more wear and tear on the home, and more frequent vacancies as renters come and go and bail during the offseason.

If you don’t want to deal with short-term vacationers, you can also try to rent to a long-term tenant. But finding longer-term renters can also be tricky, especially if the home is located in a popular seasonal travel destination, Supplee says.

“Long-term renters in these areas are far and few between,” she explains. “My area, the Pocono mountains, does not fetch high rents in the long term.”

For example, in Pocono Summit, PA, long-term rents would be in the $900 range for a three-bedroom chalet. But Supplee says the same home may rent for more than that per night during a high-season weekend.

Long-term renters also take away some of the flexibility that vacation home owners often enjoy, Schwab says. It would limit how often you could enjoy the home yourself if a tenant signs a six-month or one-year lease.

So how do you decide? If you want your rental to remain profitable, as a general rule it should earn at least 1% of its purchase price per month, Carl says. For instance, a $100,000 home should rent for $1,000 a month for a good return.

For short-term rentals, Carl suggests that your net operating income should be around 20% higher than your carrying costs (more on what those are next).

5. How much will this vacation home cost to maintain?

Vacation homes come with mortgages, taxes, and insurance, just like any other home. But, there will likely be additional costs such as maintenance, repairs, utilities, and other locality-specific charges. Turning the vacation home into a short-term rental brings even more expenses, including the following:

  • Cleaning fees could be $90 to $150 per session, according to Home Advisor.
  • Home maintenance is typically 1% to 4% of a home’s price.
  • Insurance premiums could be as much as 15% to 20% higher.
  • Property management typically costs 10% to 40% of the gross annual income.
  • Homeowners association fees vary drastically, ranging from $150 to $700 per month.

“It is important to understand that vacation rentals have a higher operating cost than traditional rentals,” Schwab says. “The normal wear and tear to vacation rentals is disproportionately higher than long-term rentals due to the high turnover of people constantly moving in and out.”

Supplee urges vacation home owners to factor additional costs into what they plan to charge to rent out the home.

6. What are the tax implications of renting out a vacation home?

The taxes associated with vacation homes can be complex, and vary based on how the property is used and how much time it is used personally versus being rented out. It’s always best to talk to a tax professional about your unique financial situation, but here’s an overview of what to expect.

In general, the amount of personal use dictates whether the home is truly classified as a rental property.

“If you have a vacation home that is rented [out] for more than 14 days during the year and your personal use does not exceed the greater of 14 days or 10% of the rental days, the home is then classified as a rental property—or, a business for tax purposes,” Supplee says.

When the home is considered rental property, rents received are reported as income. But you can deduct many of the expenses of renting out the property, including maintenance, insurance, taxes, and interest, according to the IRS. New tax rules also offer some benefits for rental property owners. Here are some of the tax benefits of owning a rental.

The post Are You Ready to Buy a Vacation Home? 6 Questions to Ask First appeared first on Real Estate News & Insights | realtor.com®.