How is Buying a Vacation Home Different From Buying a Primary Residence?

Posted by Dave Kotler on Friday, June 24th, 2022 at 9:56am.

The Difference Between Buying a Vacation Home and Buying a Primary HomeBuying a vacation home or an investment property is different than the traditional homebuying process. Buyers who already have a primary residence may be surprised by some of the ways that mortgages, taxes, and interest rates vary between these two types of properties. Whether you're eyeing waterfront homes or a ski cabin, a vacation homes can be great investments. Keep reading to find out what you need to know before buying.

Down Payment Differences

There are several down payment assistance programs that support first-time buyers, but the same programs rarely apply to second homes. For a vacation home, the buyer must put down at least 5 per cent down payment in order to secure a mortgage. Some lenders may require buyers to put down more.

Higher Interest Rates

Vacation homes are considered to be high risk when compared to primary residences because home buyers are more likely to walk away from a second home payment. To account for this risk, mortgages for vacation homes typically have a higher interest rate.

Landlord Insurance Rates

If your vacation home is rented out on a regular basis, you may need to pay landlord insurance rather than homeowner's insurance. Landlord insurance rates are typically higher than homeowner insurance rates. Talk to your insurance broker or insurance representative to find out how much you can expect to pay to insure your second home.

Tax Implications

Tax implications for second homes are very different from tax implications for primary residences. Rental income is taxable if you rent the property out for 15 or more days per year. If the home is financed, you can claim an income tax deduction for mortgage interest payments as well as property taxes. If the home is a rental property that isn't used as a residence throughout the summer, you can claim tax deductions for maintenance and depreciation.

Home Search Differences

Searching for a vacation home is far different than searching for a primary residence. Buyers looking for a primary residence often consider factors like access to schools, neighbourhood parks and hospitals. Buyers looking for a vacation home have an entirely different set of a priorities.

  • Views. Pleasant views make spending time in your vacation home more relaxingand make it more enticing to renters as well.
  • Room for lots of people to sleep. Whether you plan to rent your vacation home out to groups or you plan to use the home only for yourself, you'll want a home that provides room for large groups to sleep.
  • Outdoor living space. People on vacation often enjoy sunning themselves, grilling, playing games and napping in their backyard.
  • Safety. Assuming your vacation home will be empty for days or weeks at a time, you'll want to know that your property and belongings will be safe in your absence.
  • Access to conveniences like restaurants, stores and recreational activities. Unless your vacation home is in an isolated, remote location, access to restaurants, stores and recreational activities may be very important when you're on vacation.

Converting a Vacation Home Into a Primary Residence and Vice-Versa

It may be best to make a vacation home a primary residence, especially when it becomes more challenging to maintain the two properties or the vacation home is more desirable to live in. It is possible to convert a vacation home into a primary residence; however, most of the time must be spent in that home. Some factors to consider when turning a vacation home into a primary residence include is it is a location desirable enough to live in full-time, are taxes better in that area, or are there plans to sell the second home? 

If the vacation home is treated more like a primary residence, it might be a good idea to make the change. The same happens when a primary residence is suddenly treated more like a vacation home property. 

Pros and Cons of Renting Out a Vacation Property

Instead of leaving a vacation home sitting empty, some owners rent out the property when they are not using it. Some positive things associated with renting out a vacation property include earning extra income, which may help increase the home’s value, and the ability to deduct business-related expenses.

On the other hand, several negative aspects to renting out a vacation property include unexpected costs, paying more in taxes and fees, upkeep and maintenance could be time and money consuming, and taking time to market the rental’s availability. 

Use These Tips to Buy Your Second Home

Sometimes finding a vacation home that meets all the right criteria can take time, especially if you're living far from the location where you'll be buying your second property. Working with a capable real estate agent can help. Your real estate agent can help you pick the best neighbourhoods and can provide guidance to make the most of your real estate investment. If you're hoping to buy a vacation property, these tips can help.

Dave Kotler

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