There is a new trend catching on among younger urban residents: renting in the city and buying a vacation home as their first house purchase. This unconventional approach to first-time homebuying is one way for these buyers to achieve homeownership and all its benefits when they are priced out of their own market.
Real estate prices in most major U.S. cities are rising so high that it is virtually impossible for young professionals to start their home-owning journey within city limits. The creative solution of buying a vacation home while renting a primary residence in the city allows buyers to start building equity, earn rental income and provide them with a permanent vacation spot. If this sounds like it might fit your situation, here’s what you need to know:
This property strategy works best if you find a home just outside a major destination area or city (think New York, San Francisco, Denver, Seattle, etc.) For example, buyers who want a vacation home outside Washington D.C. might consider Alexandria or Ocean City while good Los Angeles-area vacation properties might be found in Santa Barbara or Joshua Tree. It is important that you choose an area where you personally want to spend vacation time. It should also be somewhere you can easily access in order to do regular property maintenance.
Because you only intend to spend a few weeks each year at the second home, you can help pay for the property by bringing in vacation renters. You can engage vacation property management services like VRBO or Airbnb to help with this process. Depending on going rental rates you might be able to completely pay for your monthly mortgage with the proceeds. For example, if you take out a second home mortgage in one of these areas for $400,000, your payment would be roughly $2,000 a month. If you can charge $200 a night, you will only need a minimum of 10 nights of vacationers to cover the mortgage.
Mortgages for vacation homes are different than primary residence home loans and you may find fewer options. Interest rates are typically a littler higher on vacation property loans than on traditional loans but they are still lower than investment property loans. (And you do need to spend some time each year in your vacation home in order to qualify for a vacation mortgage. If you plan to rent out the place 100% of the time, you will have to use an investment property loan.) Most second home loans require at least a 10% down payment with good credit scores and cash reserves.
Finally, in the event that you are not able book enough renters, you’ll need to have back up funds to over the rest of the mortgage. You’ll also need to have extra cash for repairs, maintenance and any property emergencies that pop up.
It you are an urban dweller who has been priced out of your home market, buying second home with your first mortgage may be the best way to enjoy the benefits of homeownership.
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