Now that you’re retired, you finally have time to enjoy the finer things in life. And if you’re like many retirees, a vacation home is a central fixture in your retirement dreams. Whether you want a wonderful place in Kona you can retreat to during the cold winter months or a second home that will one day become your permanent residence, finding the perfect vacation home is the first step toward realizing your retirement vision. Before you start shopping for that perfect Hawaiian vacation home, there are a few questions to ask yourself.
Why do I want a vacation home?
Do you want a getaway for you and your spouse, an estate where you can host your whole family, or a stylish abode that can double as a vacation rental? Do you need your second home to be move-in ready, or does the idea of a fixer-upper hobby excite you? The answer to these questions will determine what types of homes you look at.
What’s my ideal vacation home destination?
Are you a beach bum? Do you want a secluded cabin outside of a major metropolitan area or a small house somewhere near the beach? Once you have a location in mind, research Hawaiian vacation homes to get a feel for the price range. Home prices vary widely by destination, so search around for a destination that fits your vacation style.
Do I want to rent out my vacation home?
Renting out a second home is a smart strategy to earn passive income in retirement and let your vacation home pay for itself. Renting out a second home is also a lot of work. Maintaining a vacation rental yourself means you’ll have to buy locally and commit your time to marketing and cleaning between renters. (And at an average of nine hours per week, it’s no small commitment.) If you live far from your vacation destination, you’ll need to hire a property management company to rent, market, and maintain the unit in exchange for a cut of the revenue. You’ll also need to look into insurance for your rental property (use websites like Consumers Advocate to find the best policy for your home).
How will I pay for a vacation home?
Unless you have the funds to buy a vacation home in cash, this is a question that requires serious consideration. Vacation homes are treated differently than primary residences when it comes to qualifying for a mortgage. The Mortgage Reports advises that even strong applicants will be required to put at least 10 percent down on a vacation home. If you’re purchasing your vacation home with the intent to rent it out, expect even higher down payments and mortgage rates. In addition to mortgage payments, consider expenses related to travel, maintenance, property management fees, and insurance. Because risks are higher on a vacation home, you’ll pay more for insurance than you do on your primary residence. However, retirees can keep insurance costs down by bundling policies, installing an alarm system, and skipping the pool.
Do I plan to sell my vacation home?
Unlike primary residences, vacation homes don’t qualify for a capital gains exemption when it’s time to sell. The exception is if you used the home as your primary residence for at least two of the five years before selling. If you plan to sell your vacation home in the future, consider how you can reduce your tax liability either by diligently tracking expenses or using the home as your primary residence before selling. If you’ve used the vacation home as a rental property, it gets more complicated. Zacks explains the nuances.
After years of working, you deserve to treat yourself in retirement. However, before you dive into purchasing a second home, make sure you understand both your wants and the financials of owning a vacation home in Hawaii. Heading into second home ownership with your eyes open keeps the stress out so you can enjoy your retirement the way you imagine.
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