Does getting away from the hustle bustle of the city to a serene location prompt you to think about having your own vacation home? The in-built desire of home away from home for short getaways can be very tempting. But do not jump in blindly. A lot of serious thought needs to be given to some critical factors before you purchase your weekend home. Here they are:
Purpose of buy: Think about what you want out of your vacation home. How often are you going to visit it? Do you see it as an ideal location for annual family gatherings? Are you eyeing regular short-term rental income out of it to subsidise any mortgage payments or offset maintenance costs? Do you want to also double it up as a retirement home? Addressing these questions would help you to arrive at a clear decision of whether it would be worth to own a vacation home.
Location: Location of your vacation home is very important from a number of perspectives. Firstly, determine how far is it from your permanent residence. If it is more than a 3-4 hour drive or a plane ride away, you are less likely to use it often. You don’t want travelling to eat up all your time in just reaching your weekend home. Prefer a location which is at the most 3-4 hour drive from your city home. Further, visit the surrounding locality, meet up with people, assess what amenities are available, etc. You don’t want to end up in a very remote location and then bother about carrying all kinds of stuff in travel to stock up at your vacation home. Also, while buying a weekend home is a long term commitment, you never know how frequently you will be using it in the long run. Your kids after growing up may no more be interested in visiting it as other activities consumer their holidays. Your priorities may change to take time out to visit your weekend home. Even your financial situation could change and warrant a sale of your vacation home. So, choose a location which has got good rental potential and resale value. You do not want to be stuck with a dead asset for the long run.
Affordability: Work out a tentative budget. Affordability here does not just imply a one- time buying cost of the house. Once you buy it, there would be various recurring and non-recurring expenses that you would have to consider, irrespective of whether you live in the house or not. These are:
Initial costs: You would have to incur all the costs of furnishing a new home right from furniture to consumer durables, kitchen items, etc.
Maintenance & utilities: You will have to spend money on the regular utilities & other maintenance costs like water, gas, power, property taxes, etc. You would also need to hire and pay a trusted caretaker who will guard and maintain the house in your absence.
Repairs: Unwanted repair costs can always come up. You may have to shell out on repairs of electronic items, roof & water pipe leakages, etc.
Insurance: There is a high probability of a vacant house attracting thieves. There is also the risk of a fire in the case of short circuit. You would thus need to buy a comprehensive property coverage to insure for various losses.
Interest costs: If you partially finance the house through mortgage, you will have to service interest costs on the loan.
Understand tax implications: If you rent out your vacation home, the income will be taxable under the head income from house property. However, not many people are comfortable renting out their property and allow strangers or even relatives to utilise it. Note that if you do not put your house on rent and keep it vacant, you will still be paying tax on it. The property will be deemed to be let-out property chargeable to tax based on its annual value. For the purpose of taxation, annual value is calculated which is the inherent capacity of the property to earn rental income. You can however claim deductions in the form of municipal taxes, 30 per cent standard deduction and interest on loan to arrive at the net annual value of the property. A thorough understanding of taxation rules will help you decide whether to rent your vacation home or not and accordingly minimise your tax liability.
Conclusion: A vacation home is not just about fun, relaxation and building memories for a lifetime. There are huge costs involved. An untimely purchase or a wrong buying decision can disrupt your finances and affect your goals too. Besides assessing your financial preparedness, visit the location a couple of times, do you research well before you take the big decision