Are you ready to purchase a vacation home? It’s a question that is both exciting and nerve-wracking. There’s a lot to like about the idea of owning a vacation home, especially in a place like northern Maui. However, it’s important to fully understand what will be required of you before you move forward with your purchase. Here are some things to consider as you weigh your options.
1. Is the added responsibility worth it?
Owning a vacation home will require a significant amount of time and energy. This is true during the buying process as well as when you own the home. It usually takes between three and six months to complete a home purchase. This includes time spent working with your lender to secure funding, attending open houses and in-person showings, making an offer on a home that you like, and preparing for the closing date. After you own the home, you’ll split your time between your vacation home and your primary place of residence. Depending on how often you are away from your vacation home, you may want to enlist help from a property manager or a handyman who can help you maintain the house and prepare it for different seasons. It’s important to be aware of the demands of owning a vacation home. Most people find that the benefits far outweigh the costs, but you must decide if this is your perspective as well.
2. Has the funding been secured?
In some ways, the process of getting a second loan is similar to when you purchased your first home, but there are some aspects that are different. Most lenders have stricter requirements for individuals who are applying for a loan to buy a second home or an investment property. These requirements usually include a higher down payment and a more extensive credit check. Because island homes often cost more than other properties, you may have to apply for what’s known as a jumbo loan in order to facilitate your home purchase. This is especially likely when shopping for luxury properties. These types of loans have their own set of requirements in terms of debt-to-income ratio and minimum credit score. This just means that you should give yourself plenty of time to talk with multiple lenders to fully understand all of the ramifications. You’ll also want to shop around and speak to different lenders to see who can offer you the best interest rate.
3. How will you increase your ROI?
Many purchase a second home or a vacation property for investment purposes. They look forward to spending time in the home, but they also hope that they can use the home to make money. The major question here is whether or not you’re comfortable listing your home as a short-term rental. This can be a great way to recoup the money that you’ll spend to purchase the home. Since you won’t be occupying the home on a full-time basis, you can rent out the home during times when you’ll be staying elsewhere. If you would rather not have other people staying in your home, you can still raise your ROI by thinking about key upgrades or renovations that you may want to do on the property. Lately, minor kitchen and bathroom remodels have been the projects that provide the highest return. Buyers are also interested in homes that have greater energy efficiency. Fuel costs seem to constantly be rising, and it can be a major selling point to potential buyers if you can explain how they will save on their utility bills if they choose to purchase your home.
4. What are the tax ramifications?
Owning a vacation home comes with a unique set of tax ramifications. This is true regardless of whether or not you rent out the home. You can claim a maximum of $10,000 of property taxes combined between all your homes. If you’re married but filing separately, the number decreases to $5,000. You are also restricted on how much mortgage debt interest you can claim. You are able to write off the interest from $750,000 of debt each year. This number also represents a combination of the debt on both homes that you own.
Other tax obligations come into play if you use your home as an investment property. You won’t have to report the income if you rent your home out for less than fourteen nights during a given year. In this scenario, you wouldn’t be able to write off any expenses on the home besides what was mentioned above. If you rent your home out for more than fourteen nights during a particular year, you will have to claim the rental income on your return, but you can also write off various expenses associated with owning and operating the home. Deductible expenses include utilities and maintenance on a prorated basis and any salary you pay to a property manager or a communications director.
5. Who can help you shop for a vacation home?
Now that you’re finished reading this article, the same question still exists. Are you ready to purchase a vacation home? If you feel confident about taking the next step, reach out to the Ohana Real Estate Group. They are happy to help you begin the process of shopping for a vacation home in the Makawao area. Their agents are experienced, knowledgeable, and trustworthy and take the time to listen to each of their client's unique needs so that they can understand exactly what they are looking to accomplish during their real estate transaction. They would love to partner with you throughout the process of buying or selling your next home.