Vacation Home or Income-Producing Investment
Posted in Buying by Meaghan McGlynn
Image Source: Alex Master Shutterstock
Whether you’re a skier who loves the mountain slopes of Colorado, a lover of the beaches of Southern California, or a potential retiree seeking to escape the snow-laden Northeast for the wide-open, sunny lands of Arizona, there are homes available to meet a wide range of budgets. The biggest decision a potential second homeowner must make is whether they are going to solely own their vacation home or turn it into a vacation rental. Here are the advantages and disadvantages to both options:
Investing in vacation rentals
- A good vacation rental property generally provides a healthy rental revenue which could potentially cover mortgage payments while also generating healthy additional profit.
- Using an online short-term rental service like Airbnb makes it convenient to manage your rental property. Their website interface makes pricing, marketing, and communication with potential guests quite straightforward and easy. Airbnb will also oversee the billing process for you.
- You may qualify for federal tax breaks and deductions related to your investment property. Everything from professional fees or commissions – including property management services- to cleaning and maintenance are potential tax write-offs.
- Vacation rentals can be costly to manage, both in terms of time and money. These properties may require seasonal upkeep and special maintenance considerations. You may even incur costs to maintain or monitor the property even when it’s not actively being utilized.
- Vacation rental properties are particularly sensitive to seasonal fluctuations and economic downturns, which could leave you financially exposed if you suffer a lack of booking revenue.
- Many states and cities are cracking down on short-term rental services. In California, for example, the fight has been primarily local, reaching a fever pitch in the San Francisco Bay Area. Increasingly state and local municipalities are seeking to reign in short-term vacation rentals, which could put a damper on potential revenue from these properties.
- You may experience higher renovation and repair costs on a short-term rental. Most travelers expect the latest appliances and furnishings, so you will have to update every few years. Unfortunately, short-term renters are less likely to report any necessary repairs and guests are far less likely to treat the property with respect since there’s no sense of ownership or obligation.
Owning a vacation home
- Long-term profits: While assets fluctuate in value in the short term, vacation properties are more likely to retain their value and appreciate because they are located in popular areas with a geographically limited supply.
- Familiarity: Returning to the same place time and after time can be comforting as you become familiar and comfortable with the location. It allows you the freedom to be yourself and the opportunity to expand long-term friendships with residents.
- Convenience: The ability to conveniently store items that are used exclusively at the second home simplifies travel and packing.
- Retirement head starts: Though we may love where we work and live, every place has its drawbacks. A common goal of retirement is to have a place to retreat for the times of the year we dislike the most at our main residence. Locating and buying a second home prior to retirement enables you to experience the benefits of a refuge before actual retirement, a time to correct and amend your plans if the reality is different than the dream.
- Initial purchase costs: Most people have higher expectations for a property that they intend to own, rather than to rent. These expectations can translate into high prices.
- Home maintenance: As the homeowner, you are responsible for all home maintenance work.
- Travel time: A second home will be located hours from your primary residence, requiring either long auto trips or airline flights.
- Inflexibility: If you are paying a significant amount of money each month for a second home, you may feel that you need to constantly visit the property to justify your investment.
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When it comes time to sell your home, determining its exact value can be a challenge. Naturally, homeowners want to get the most value for their home. However, if it hits the market at too high a price, it could cause serious complications in the selling process.
Attracting the wrong buyers
An overpriced home creates a kind of seller’s limbo that draws the attention of the wrong buyers, which is a surefire way to start your selling process off on the wrong foot.
A vast majority of homebuyers begin their home search online, especially during these days of social distancing amidst the COVID-19 pandemic. If your home is overpriced in comparison to other listings in your area, it won’t appear in their search results. In this way, an overpriced home is blind to its intended buyers and actually drives traffic to nearby listings that are more accurately priced.
An overpriced home can’t compete with listings in a more expensive bracket. Buyers know what they want, and they know what to expect in their price range. When they notice a home is missing the square footage, features, and amenities typically found in others at the same price, they will quickly lose interest.
Fewer showings / virtual tours
Showings—both physical and virtual—play a significant role in the sale of your home. They give buyers a first-hand look and provide them the opportunity to ask questions and gather more information. Selling your home is a numbers game. The more showings scheduled at your listing, the more potential buyers you have. The more potential buyers, the greater chance of an offer.
Your agent knows that showings are critical to capturing buyer interest. But if the home is overpriced, they will have difficulty attracting attention to your home. This can slow the entire home selling process, leaving both the seller and agent feeling frustrated.
Expired shelf life
Think of the home you’re selling as a fresh tomato. Off the vine (newly listed), it is fresh and attractive, appealing to everyone in the market and standing out amongst the other tomatoes. As time goes on, no one buys the tomato and it begins to overripen and wither, losing its appeal. This is what happens to an overpriced home in the minds of buyers.
New listings attract the most attention—that’s when buyer interest is highest. The longer your home is on the market, the less appealing it becomes. At a certain point, sellers are forced to lower the price. However, this lowered price won’t have the same impact as hitting the market correctly priced the first time. Once price drops begin, they can continue, which creates the risk of selling the home for less than what it is worth.
Lastly, the longer your home is on the market, the more expenses you incur. Mortgage payments, utilities costs and seller’s fees will continue to pile up, making it harder to recover from these costs when your home does eventually sell.
Let’s say you do find a buyer at the overpriced cost. During closing, the lender will order an appraisal of your home, and if the appraiser finds that the market value of the home is less than the selling price, they could potentially deny financing.
Talk to your Windermere agent about how to price your home correctly to avoid these pitfalls of overpricing. Knowing your home’s worth will set you up for success when it comes time to hit the market.
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Many homeowners have taken this extra time at home as an opportunity to retreat to their backyards and patios, turning their space into their own personal oasis. Here are some ways you can upgrade your outdoor space to make the most of the remaining days of summer.
Add decorative throw pillows to your outdoor furniture to complement your garden’s color palette and bring some added comfort for you and your guests. Brightly colored patio umbrellas make a statement while protecting you from the sun and other outdoor elements.
In addition to having colorful flowers in your garden, another great way to add a little pizzazz to your backyard is through colored pots and planting boxes that enhance the surrounding decor.
Outdoor lighting can transform your outdoor space and set the perfect mood for those late summer nights.
LED lights are a very popular option for patio lighting, using up to ninety percent less energy than incandescent varieties. Strings of twinkle lights bring a magical nighttime quality to your backyard, creating the perfect ambience for those summer evenings under the stars. Installing light fixtures around eating areas and your landscaping will give these spaces new life during evenings outdoors.
Upgrade your BBQ
The barbecue is the focal point of summer cookouts. Any time the grill gets fired up, classic summertime dishes like burgers and ribs come to my mind. However, there are simple upgrades you can make to your barbecue that give you even more options to maximize outdoor meals.
Pizza stones are perfect for making evenly cooked, delicious pizzas on the grill. They also produce a consistent heating surface for baked goods and desserts. Griddles do wonders for barbecues, allowing you to cook foods that would normally fall through the grates, like vegetables and shellfish.
Fire pits are the modern-day conversation pit, providing the perfect spot to gather with friends and family – even during these days of social distancing. Commonly used building materials include brick, landscape blocks, stone, or cinder blocks. Traditional fire pits are best accentuated with circular seating to gather around the fire, while more modern styles like fire troughs best allow for taking in surrounding views. Natural gas fire pits offer a low-maintenance substitute to the wood-burning variety, igniting fires at the flip of a switch with easy control over the flame’s intensity.
Whichever fire pit you choose, be sure to consult local guidelines and regulations, and keep an extinguisher nearby to squash any rogue flames. If fire pits are not allowed in your area, consider safer options like flameless candles.
With more time being spent at home than ever before, there is plenty of opportunity to make the most of the home stretch of summer. We hope we’ve inspired you with some ways you can get creative with your slice of outdoor paradise.
It is a seemingly simple question. However, discovering the worth of your home is more complicated than it might seem. Sites like Zillow, Redfin, Eppraisal, and others have built-in home valuation tools that make it seem easy, but how accurate are they? And if you get three different answers, which one do you believe? Online valuation tools have become a pivotal part of the home buying and selling process, but they’ve proven to be highly unreliable in certain instances. What these valuation tools have made clear is that real estate agents are as vital to the process of pricing a home as they ever were—and maybe even more so now.
Every online valuation tool has its limitations. Most are readily acknowledged by their providers, such as “Zestimate” from Zillow, which clearly states that it offers a median error rate of 4.5%. That may not sound like a lot, but keep in mind that 4.5% amounts to a difference of about $31,500 for a $700,000 home. For Redfin and Trulia, there are similar variances. When you dig deeper into these valuation tools, it’s no wonder that there are discrepancies. They rely on a range of different sources for information, some more reliable than others.
Redfin’s tool pulls information directly from multiple listing services (MLSs) across the country. Others negotiate limited data sharing deals with those same services, relying on public and homeowners’ records alike. This can lead to gaps in coverage. These tools can serve as helpful pieces of the puzzle when buying or selling a home, but the acknowledged error rate is a reminder of how dangerous a heavy reliance on them can be.
Nothing compares to the level of detail and knowledge a professional real estate agent offers when pricing a home. An algorithm can’t possibly know about the unique characteristics of neither a home nor its neighborhood. Curious about what improvements you can make to get top dollar or how buyer behaviors are shaping the market? They cannot provide an answer there, either. That can only be delivered by a trusted professional whose number one priority is getting you the best price in a time frame that meets your needs.
If you’re curious about your home’s value, Windermere offers a tool that provides a series of evaluations on your property and the surrounding market. And once you’re ready, we’re happy to connect you with a Windermere agent who can clarify this information and perform a Comparative Market Analysis to get an even more accurate estimate of what your home could fetch in today’s market.
On this week’s episode of “Mondays with Matthew,” Matthew Gardner looks at last week’s real estate and economic news and goes beyond the headlines so that you can not only stay on top of the issues that affect you and your business, but also get more detail than is generally offered by the media.
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For some homeowners who have been financially impacted by the COVID-19 pandemic, there is a high level of concern about paying their mortgage. Fortunately, there are options to aid struggling homeowners from governments, financial institutions, and loan providers. The following information is intended to provide clarity on which financial relief options are available to you during this time.
What are my mortgage relief options?
Newly placed into law, the Coronavirus Aid, Relief and Economic Security (CARES) Act, provides two protections for homeowners with federally backed mortgages:
- Your lender or loan servicer may not foreclose on you for 60 days following March 18, 2020. The CARES Act prohibits lenders and/or servicers from beginning a non-judicial foreclosure, or finalizing a foreclosure sale, against you within this time period. While 60 days has passed since this was put into place, it is still important to be aware of in the event that any of these actions were taken against you.
- You have a right to request a forbearance for up to 180 days if you experience financial hardship due to the COVID-19 pandemic. You can also apply for a 180-day extension beyond the forbearance period. This does not require submitting additional documentation beyond your claim, nor will you incur additional fees, penalties or interest beyond what has already been scheduled.
- With forbearance, mortgage servicers and lenders allow you to pause or reduce your mortgage payments for a period of time while you get back on your feet financially.
- Different types of loans beget different forbearance options, understanding the differences and which options apply to your loan is key to navigating the forbearance landscape.
- Once your income is back to a normal level, contact your loan servicer and resume your payments.
Forbearance is not…
- Forbearance is not a means to forgive or erase your payments. Any missed or reduced payments still require payment in the future.
Which relief options do I qualify for?
The first step in discovering your mortgage assistance qualifications is to contact your mortgage provider. If you are unsure of how to get in touch with them, look at your mortgage statement for contact information or see what contact options are available online.
After you have successfully made contact, find out if your mortgage is federally backed. To be eligible for assistance under the CARES act, your mortgage must either be backed federally, or by one of the entities in the list below. These links show the agencies’ current advise and related loan information:
- U.S. Department of Housing and Urban Development (HUD)
- U.S. Department of Agriculture (USDA)
- Federal Housing Administration (FHA)
- U.S. Department of Veteran Affairs (VA)
- Fannie Mae – Loan Lookup
- Freddie Mac – Loan Lookup
For non-federally backed loans, contact your lender or servicer to learn more about their forbearance repayment options.
Today’s financial landscape can be stressful for homeowners, especially those that are struggling to keep up financially. Fortunately, these entities, institutions, and servicers have provided options to help lessen the burden. Knowing which options apply to you and your household will help you navigate through hardship as your finances recover.
Mondays with Matthew: Mortgage Forbearance Update
On this week’s episode of “Mondays with Matthew”, Matthew Gardner provides an update on the mortgage forbearance program and what type of effect we can expect it to have on the US housing market.