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By John Shadden | As summer begins, you may already be counting down the days until your annual vacation. If you enjoy returning to the same getaway every year because you enjoy the familiarity and location, you might be in the market for a vacation home. A home away from home doesn’t just come with its own convenience and lifestyle benefits; it can also be a smart investment.
When it comes to purchasing a vacation home, there are multiple considerations to ensure your financial house is in order. As with any major purchase, have a complete picture of all associated costs. Upfront costs associated with purchasing a new home include mortgage plans, homeowners insurance and interest rates.
Smaller but significant costs such as refurbishing, upkeep and utility costs can be unpredictable in the long-term and may vary by region, neighborhood or season. To properly manage these costs, it’s important to work with your financial advisor to understand your credit needs and borrowing ability.
Despite the significant costs associated with purchasing or renting a new home, a vacation home can be a good investment for a number of reasons. As an investment, it is always a buyer’s hope that the home will appreciate in value over time. Home values are typically the result of many complex economic factors, but certain characteristics like location in a fast developing city or proximity to the beach can have an important effect on the home’s future value.
According to a report by DataQuick and the California Association of Realtors, prices in the southern California housing market have been steadily rising over the past few years. As of January 2015, the median number of houses and condos sold in Los Angeles was down 3.6 percent but the median price was up 12.2 percent over last year. As long as there is an apparent decrease in supply and a continuing demand for homes in Los Angeles, purchasing a home here can represent a smart investment decision.
Vacation homes have also become a reliable source of income for owners who are interested in renting to guests on a short-term basis. With vacation rental websites making it easier to rent your home temporarily, you can harness the value of the sharing economy to pay off the original costs of purchasing the home.
To make a suitable profit from renting your home, you’ll need to set a list price. Consider other listings in your area to set a competitive price as well as closing costs associated with renting the house including cleaning, utilities and taxes. Many peer-to-peer websites also charge their own booking fees and there is always the risk of damage. All of these costs should be factored into your decision to rent out your vacation home.
Whether you plan on selling your second home at a higher value or renting it out over time, you can make some features of your house pay for themselves. Your experience as a single home owner should have given you basic knowledge on how to make your home more efficient, but don’t forget to apply this knowledge to your vacation home. Drought tolerant landscaping, solar panels or water-efficient appliances may help you save thousands of dollars on utility bills in the long-term.
With the right planning, a vacation home can be a great investment in an enjoyable summer and in many future years to come.
John Shadden is a Financial Advisor with Morgan Stanley Wealth Management in Long Beach, CA. The information contained in this interview is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney, LLC, member SIPC.