If you’ve been dreaming of buying a cabin in the woods, a cottage on the beach or some other retreat, you have compelling reasons to pull the trigger. As coronavirus cases surge in parts of the country, being able to shelter away from crowded areas has a lot of appeal. To keep employees healthy, some companies continue to allow telework, reducing the need for workers to be near their offices. Why not plug in with a view of the ocean or mountains?
What’s more, mortgage interest rates have sunk to record lows. In mid July, the average rate on a 30-year fixed-rate mortgage dipped to 2.98%—the first time the rate has fallen below 3% in the nearly 50 years that Freddie Mac has been keeping records.
But be prepared to compete with other buyers for the house you want. Following spring shutdowns to slow the spread of COVID-19, buyers emerged hungry to live in locations and houses with more space and other features suited to spending a lot of time at home. Sellers have been slower to list their homes, however, causing a shortage in many areas of the country. In June, U.S. housing inventory fell by 27% from the same period a year before, according to Realtor.com.
Many popular vacation spots are no exception to the trend of tight inventory and pent-up buyer demand. In late June, Nancy Reither, a real estate agent with Coldwell Banker in Ocean City, Md., said that the city had about 340 listings, compared with about 1,500 at the same time a year ago.
Since the pandemic-related shutdowns eased and buyers were able to look at homes again, “I have not been able to take a day off,” says Bill Cullin, a Long & Foster agent who focuses on the Delaware beaches north of Ocean City. The beaches are within a few hours of major metropolitan areas including New York City, Philadelphia and Washington, D.C., and buyers are driving there as air travel becomes less desirable during the pandemic, says Cullin. Plus, many buyers expect to work from home until sometime this fall, and some are permanently permitted to telework.
In northeastern Florida, buyers are snapping up second homes—especially oceanfront properties and those with swimming pools, says Cara Ameer, a Coldwell Banker agent based near Jacksonville as well as in Orange County, Calif.
How the housing market fares in coming months will depend largely on the economy’s trajectory, says Danielle Hale, chief economist for Realtor.com. If the economy slowly improves, buyers may continue to grab properties as they come on the market. A weakening economy, however, may mean more owners putting their houses up for sale out of financial necessity but fewer buyers jumping in to purchase them. The status of remote work and education will affect the vacation-home market, too. “If schools or colleges resort to remote learning again in the new school year, we would expect a continued surge in interest and shopping for vacation homes,” says Zillow economist Jeff Tucker. That would be unprecedented for the quieter fall and winter seasons, he adds.
Home prices are stable. In June, the median listing price was 5.1% higher than a year before, according to Realtor.com. Many homeowners who lost income because of the pandemic have had legally mandated access to mortgage forbearance, helping to avoid distressed sales that can push down prices. And leading into the crisis, the overall health of homeownership was stronger than with the previous downturn, says Skylar Olsen, senior principal economist for Zillow.
To help you navigate the vacation-home market, we’ve explored what to expect as you search, ways to make your offer stand out, and mortgage and tax considerations. With data from Realtor.com (opens in new tab), we’ve also highlighted five vacation areas around the country that are attractive in terms of inventory and price.
Lay the groundwork
If you’re eyeing a place that you’ve visited only as a vacationer, keep in mind that owning a home there comes with a different set of concerns. Talk to locals about living in the area, and visit it during the times of year you plan to be there. You may realize that a community quiets down—with some restaurants and shops closed—more than you may have expected during certain seasons, or that you don’t like being there when it’s most active, says Ameer. Find out whether the community normally offers activities and entertainment that you’ll enjoy during extended visits—say, golf courses, great restaurants or an arts scene.
Do you prefer a condominium, a detached home or something in between, such as a townhouse or duplex? A house may offer more privacy—a coveted trait during the era of social distancing—and you won’t have to worry about pet restrictions or other limitations that sometimes come with communal properties. But you’ll likely have increased responsibilities that may be tougher to manage when you’re not there, such as snow removal, lawn mowing and landscaping. With a condo, the association typically takes care of such tasks (although you’ll likely pay a fee to cover them). Plus, internet and cable may be included. Especially if you’re interested in an attached property, try to get a sense of whether the neighbors frequently rent out their properties. “Nobody wants to find out that it’s like a fraternity party every weekend in the summer,” says Ameer.
If you live hours away from your vacation-home destination, you may have limited time to visit properties. Look for 3-D virtual tours that let you digitally walk through homes, giving you a better idea of the layout than regular photographs. Or your agent may give you a live video tour through FaceTime, Skype or a similar app. That may help you narrow down your list. Once you’re ready to tour houses, you can expect to follow safety protocols such as signing a form to verify that you have no symptoms of COVID-19, wearing a mask and wiping down surfaces that you touch.
Don’t bust your budget
Snagging a bargain is tough in a seller’s market, but you can use a few strategies to help keep the sale price in your range. One is to shift away from central locations and extend your search to outlying areas. Brenda Wild, a Remax agent in Aspen, Colo., has seen a surge of interest in towns such as Carbondale and Basalt, where buyers can get more for their money than in ski towns Aspen and Snowmass. Ameer says that buyers who go an hour and a half south of Ponte Vedra Beach, Fla., where she is based, may find less-expensive properties in quiet coastal towns—but they’re farther from the activities and upscale amenities that some buyers prefer.
You may be able to get a deal by buying during off-peak tourism seasons. In the Ocean City area, September through December is typically a good time to buy, says Reither—and she expects that to hold true this year. Short-term rentals were banned in the spring because of the pandemic, and some vacationers canceled their summer bookings to avoid risk of contracting COVID-19. Owners who lost a portion of their usual rental income may decide the investment is no longer worthwhile and put homes up for sale when summer ends. “I’m working with a couple of investors now who have eight and 10 properties here. They’ve already sold two, and they’re talking to me about listing the rest of them at the end of the rental season,” says Reither.
If a turnkey home—that is, one that requires no extensive repairs—is fairly priced and in a prime location, chances are high that multiple buyers will put in bids. In a hot market, you’ll have to act swiftly from the time it’s listed to submit an offer. Work with an experienced, full-time agent, who will more likely have a deep knowledge of the local market and be available to move more quickly than someone who works part-time, says Reither.
A few tactics may help make your offer stand out. If you can swing a cash offer, that’s often attractive. But find out what’s important to the seller—not all sellers prioritize cash bids or the highest-price offer. Sellers often favor “clean” contracts with as few contingencies and extra requests as possible—so you may want to avoid asking the seller to, say, pay for a home warranty or let you keep the gas grill on the patio. But it’s generally a bad idea to skip the home inspection.
Ask about the seller’s preferred timeline to complete the sale. If the owner hopes to keep the home for a few more months and you’re up against other bidders who propose a 30-day window, you may win by offering flexibility to let the seller stay for a while. If price seems to be the seller’s main concern, one trick is to include an escalation clause in your offer. You may, for example, propose a $350,000 sale price but include a condition that you’ll pay $1,000 more than the highest competing offer, up to $360,000. If you’re getting a mortgage, include a preapproval with your offer.
One other idea: Write a letter to the seller describing yourself and the reasons you love the home. Especially if the owner occupied the home—rather than renting it out to vacationers full-time—“that can really touch their heart,” says Sindy Ready, a Remax agent in Scottsdale, Ariz.
Plan for routine expenses
Before you commit to a home, consider all the ongoing costs that come with it. For example, if you buy where skiing is popular, the heating bill could be substantial. The same goes for the electricity bill for air-conditioning in hot-weather locales. Be sure you understand seasonal maintenance and special fixtures you may need. In coastal Florida, you’ll have to get hurricane shutters—and have someone on hand who can quickly apply them and secure your property if you’re away when a storm is approaching, says Ameer. If you don’t frequently visit the home yourself, someone should regularly check it for leaks or other problems, and you may need to hire services for snow removal, pool and lawn upkeep, or other maintenance.
Check into the type of insurance coverage you’ll need and how much it costs. Flood insurance is a must in areas at high risk of flooding—and your mortgage lender may require it in certain areas. If the property is part of a homeowners or condo association, look up its fees.
As you create a budget, don’t overlook kitchenware and furniture to put both inside the home and on a patio or poolside. You’ll want to estimate the cost of travel to and from the property each year. Some vacation-home owners buy another car or truck to keep at the new home, and if you’re near water, chances are you’ll want a boat.
Financing and taxes
If you’re getting a mortgage, it’s often smart to use a local lender. It may move more quickly and efficiently than a bigger institution, and it is likely to send out an appraiser who is familiar with the area and who may provide a more accurate estimate of the home’s value than someone from outside the region. Ask your real estate agent for recommendations.
Mortgages for second homes differ from those for primary homes in a few ways. Borrowers who encounter financial difficulties are more likely to default on a second-home mortgage than one for a primary residence, and lenders take that risk into account. Interest rates are often about 0.25 to 0.5 percentage point higher for second-home mortgages than for primary-home loans, says Keith Gumbinger, vice president of mortgage-information site HSH.com. You’ll have to make a down payment of at least 10% (for a primary home, you may be able to put down as little as 3% with a conventional mortgage), and some lenders require 20%. Minimum credit-score requirements are a bit higher than those for primary homes. With a loan-to-value ratio (the amount you owe on the loan as a percentage of the home value) higher than 75%, you may need a minimum FICO score of 680 to qualify (on a scale of 300 to 850), compared with about 620 to 640 for a primary-home loan, says Gumbinger. You’ll likely be required to have cash reserves to cover at least a few months’ worth of mortgage payments. You may expect to earn some rental income (see below), but such potential earnings won’t help you qualify for a loan on a second home. If you won’t occupy the home and plan to rent it out full-time, it’s considered an investment property, and rental income may be considered.
Tapping equity in your primary home is one way to raise cash for your second-home purchase. Your options include a home-equity loan or line of credit or a cash-out refinance, in which you borrow more than you owe on your primary home and take the extra money as cash. But with the economy taking a hit, lenders are tightening up on home-equity borrowing.
For mortgages obtained after December 15, 2017, homeowners who itemize on their federal tax returns can deduct interest on up to $750,000 in total loan balances ($375,000 if married filing separately), including both a primary and a second home; for older mortgages, you can deduct interest on up to $1 million of debt, or $500,000 if married filing separately. If one of your mortgages falls into the first category and the other into the second, consult a tax adviser for help, suggests Mark Alaimo, a certified public accountant and member of the American Institute of CPAs Personal Financial Specialist Committee. You may also be able to deduct state and local property taxes, up to a $10,000 combined limit ($5,000 if married filing separately) on state and local income, sales and property tax.
If you live in your vacation home more than 14 days or more than 10% of the total days you rent it out at a fair rental price (whichever is greater) during the tax year, the IRS considers it your personal residence and not exclusively a rental property. If you rent out your vacation home fewer than 15 days per year, the rental income is tax-free. If you rent it out more than 14 days per year you must report the rental income on your tax return, and you can deduct rental expenses such as for mortgage interest, real estate taxes, maintenance and utilities. But you can deduct only the portion of those expenses incurred while renters are using the home.
Rent it out?
You may plan to rent out your property when you’re not visiting it yourself to help defray costs, but that’s a shaky prospect until the pandemic is in the rearview mirror. Rental activity has returned in many popular vacation areas, but state and local governments may once again bar short-term rentals in areas where COVID-19 cases are spiking. And even where rentals are permitted, vacationers are concerned about the risks of going into other homes.
“Be very conservative” with your expectations for rental income, says Michael Slevin, president of Berkshire Hathaway HomeServices Colorado Properties. “Make sure you can weather another shutdown.” Also read up on the community’s rules when it comes to rentals. Some homeowners or condo associations disallow short-term rentals at all times, and some may prohibit renters from using facilities such as the pool or gym.
If you do rent out your home, hiring a good housekeeping service is important. Guests seeking vacation rentals are increasingly running web searches with key words related to cleanliness, says Shaun Greer, senior director of real estate for Vacasa (opens in new tab), a vacation-rental booking site. Pandemic or not, renters like comfortable, quality furnishings. “You can’t have mismatched glassware in the kitchen with a luxury vacation rental,” says Ready.
Lisa has spent more than15 years with Kiplinger’s Personal Finance and heads up the magazine’s annual rankings of the best banks, best rewards credit cards, and financial-services firms with the best customer service. She reports on a variety of other topics, too, from retirement to health care to money concerns for millennials. She has shared her expertise as a guest on the Today Show, CNN, Fox, NPR, Cheddar and many other media outlets around the nation. Lisa graduated from Ball State University and received the school’s “Graduate of the Last Decade” award in 2014. A military spouse, she has moved around the U.S. and currently lives in the Philadelphia area with her husband and two sons.
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