5 reasons not to own a vacation home

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How to Decide If You Should Purchase a Vacation Home

If you've always dreamed of owning a vacation home, you're not alone. An estimated 1.13 million vacation homes were sold in the U.S. in 2014, and vacation home sales accounted for 21% percent of residential real estate transactions that year. But before you fall in love with that vacation property, consider these five reasons to back away.

1. Maintenance costs may be higher than you think

Whether it's your primary residence or a vacation property, buying a home means opening yourself up to a world of unwelcome surprises. From busted furnaces to leaky roofs, maintenance costs can add up to the point where you wind up taking on far more than you initially bargained for. Imagine you end up spending $5,000 a year on property maintenance and repair costs. Over the course of 30 years, that's an extra $150,000 on top of your mortgage payments and real estate taxes.

2. Property taxes have a way of going up

Property taxes are a major expense for homeowners, and even during periods where home values drop, they have a strong history of rising. In 2000, local governments across the U.S. collected roughly $247 billion in real estate taxes, but by 2010, that figure reached $476 billion. If your vacation property is reassessed, or if its local municipal tax rate is approved for a hefty increase, you could see a significant real estate tax hike, which could, over time, add thousands of dollars to your cost of ownership.

3. You can't count on the rental income

Thinking of renting out your vacation home on occasion to help cover your costs? It may not be as lucrative a prospect as you'd expect. Unless you live close enough to keep tabs on your property and are willing to take the time to market it and deal with short-term renters, you'll probably need to enlist the help of property manager, who might charge you anywhere from 8% to 12% (or more) of the property's rental value in exchange for those services.

Even if you're willing to rent out your space and pay a property manager to help find tenants, you may not wind up getting any takers. Plus, renting out your property might result in more damage and wear and tear, which can lower your home's value over time. Finally, rental income is taxable, and while you can deduct certain costs associated with renting out your home, you can't rule out the possibility of owing the IRS some money.

4. You may not get the full benefit of deducting mortgage interest

The IRS allows you to deduct mortgage interest on your primary or secondary residence, but only up to $1 million all-in. If you have a $600,000 mortgage on your primary home and need a $500,000 mortgage to finance your vacation home, you won't be able to write off all of your interest. Furthermore, while the mortgage interest deduction has been around for a long time, it's not set in stone. Critics of the current system have been pushing to get rid of this benefit for years, and there's no way to predict whether it will remain in effect for as long as you plan to own your vacation home.

5. It's not a liquid investment

You never know when you might need to liquidate an investment to get your hands on some cash, but selling a home is not an easy prospect. First you need to find a real estate agent. Then you need to get your home listed. From there, you need to bide your time during what could be a string of open houses, which may or may not prove successful in finding you a buyer. And even if you do find someone who's interested in purchasing your home, there are a multitude of hiccups you might encounter (contract disputes, issues with the inspection) en route to a closing date. In the grand scheme of investments, property just isn't an easy one to sell -- especially when you compare it to a vehicle like stocks, which trade daily on public exchanges.

If you're buying a vacation home for emotional reasons and you unquestionably have the finances to do so, by all means, give it a go. But if you're buying that vacation home as an investment, you may be better off putting that money into stocks, mutual funds, or even REITs, which give you a piece of the real estate action without actually having to take out another mortgage. Buying a vacation home is a fairly risky prospect, and one that you shouldn't pursue unless you're truly in a financially comfortable place. You're better off renting somebody else's vacation home, paying a modest fee for the week, and walking away knowing that the crumbling porch and sinking foundation are somebody else's problem.

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