Beginners’ guide to buying a vacation home

Not many investments offer you the same combination of personal and financial rewards as buying a vacation home. Although it’s a significant commitment, it can be a long-term investment in your family’s happiness and financial security. And you don’t have to be a real estate tycoon—or particularly rich—to buy a second property.

We aren’t financial advisors, but as the leading vacation rental management company in the US, we are experts in how to make the most of your investment in a second home. This beginners’ guide on how to buy a vacation home includes data-driven insights from specialists across our teams to help you make the smartest investment.

Why buy a vacation home?

Buying a vacation home allows you to build wealth, plan for retirement, and—of course—vacation. Knowing which benefit is most important to you, and how you’ll weigh each factor, will help you choose the right home to meet your goals.

For your own vacations

If you’re considering buying a second home primarily to host your own vacations, you aren’t alone—nearly half of vacation home buyers surveyed in 2017 intended to use their property for personal use or family trips.

However, it’s still worth understanding what makes specific properties attractive to paying guests. Changes in your own life or beyond your control (like the housing market or tax code) may put you in the position of renting down the line.

For example, Vacasa was founded during the Great Recession in 2009, and many of our early homeowners signed on due to those economic changes. Another wave of homeowners are currently considering renting out their properties for the first time, thanks to the 2018 tax code update that introduced a new cap on mortgage interest deductions (more on that in a minute).

Your second home can always be your own private getaway, but taking its future earning potential into consideration now could end up paying off in the long run.

To build wealth

Real estate is an appealing investment because you don’t need to put down the whole value upfront. And when you buy a vacation property, with the full intent of renting it out to guests, you can help offset the cost of the additional mortgage, property taxes, and ongoing cost of maintaining a second home—while likely providing a long-term return.

For retirement

Your parents were right—it’s never too early to plan for retirement. And while you’re building up your 401(k), why not consider purchasing the home you’ll retire to someday?

Retirement may be a few years (or decades) off, but consider this: In your 40s and 50s, it’s easier to get approved for a mortgage since you’re still employed, making your debt-to-income ratio (DTI) fairly low. It’ll be easier to enter retirement debt-free if you buy your second home early (especially if you rent it out). And, if you use the home to generate income, you’ll enjoy a bit of extra cash flow that could be funneled towards an emergency fund, your IRA, or a child’s college fund.

Can you afford a vacation home?

Once you have a clear understanding of why to buy a vacation home, the next step is understanding the cost—whether you can afford it.

Budgeting for a vacation home is different than your primary residence, in part because mortgage lenders and the IRS will treat your purchase differently based on whether they categorize it as a second home or an investment property.

Mortgage lenders and the IRS look at different factors to categorize your home (and may define them differently), but generally speaking, an investment property is rented out to generate additional income while a second home is for your own personal use. Taking out a mortgage may be easier for a second home than an investment property, but there are trade-offs when it comes to how you file your taxes.

This can get a little complicated, so bear with us. (And our lawyers would like us to clarify that we aren’t financial advisors or accountants, so please consult the licensed experts after reading our general overview.)

Vacation home mortgages

Unless you’re intending to buy your vacation home with cash, you’ll need to apply for a mortgage. Lenders are more particular about approving a second home mortgage because they’re usually considered subordinate to your primary home mortgage—meaning you’ll have to pay the first one back before the second if you default on the loans and go into foreclosure.

Keep in mind that both investment properties and second homes are ineligible for government loans (like an FHA, USDA, and VA loans).

To qualify for a second mortgage, you’ll need:

  • A debt-to-income ratio (DTI) below 41%: This percentage is determined by dividing your monthly debt by your gross monthly income. It essentially tells lenders how much of a financial safety net you have, and if you’d be able to still pay off your loans in the case of unforeseen circumstances.
  • A good credit score: Having a healthy credit score is always a good idea, but it’s especially important when buying a vacation home. The higher your score (a 620 or up is considered pretty good) the more likely you’ll be to qualify for a conventional loan (and pay lower interest rates).
  • Cash reserves: In addition to your DTI, lenders may look at how much money you have tucked away. Buyers with a savings account, a growing IRA, an emergency fund, and a college fund appear safer than a borrower with little money to their name.

Mortgages for investment properties

Investment properties usually require more stringent qualifications, higher down payments, and higher interest rates than second homes. This is because investment properties are considered higher-risk—if you run into financial trouble, you’re more likely to walk away from a home you don’t live in than one you do.

Mortgages for second homes

Second homes usually receive better interest rates and require lower down payments than investment properties, but being dishonest about your intentions is considered occupancy fraud.

Lenders typically require that a second home is at least 50 miles away from your primary residence, while a property less than 50 miles away is considered an investment property—because you aren’t likely to vacation in a home so close to where you live full-time.

Vacation rental tax rules

Like mortgages, tax rules will be a little different for a second home, especially if the home is an investment property. If you’re planning to buy a vacation home, it’s a good idea to find a financial consultant who can help you get the most out of your rental income.

Investment property taxes vs vacation rental taxes

The IRS makes specific distinctions between an investment property and a vacation rental property:

  • An investment property is one that you don’t use, but rent out to someone else.
  • A vacation rental is one that you use some of the time—you occupy the home for more than 14 days a year (not including any days you spend making improvements to the property), or 10% of the total days you rent it out per year.

Investment property income can be taxed differently than vacation rental income, since expenses for an investment property are considered business costs rather than personal spending.

There is also a special rule for the inverse, known as Minimal Rental Use: If you only rent your second home out 14 days per year, then you don’t need to claim the rental income or get to deduct any “rental expenses”. Otherwise, you'll need to claim income from your vacation rental.

When you’re preparing your taxes for your vacation rental, you’ll need to divvy up the expenses between rental use and personal use. And you may be limited on which deductions you can take, such as property taxes, mortgage interest, and Realtors’ fees.

2018 tax updates

The Tax Cuts and Jobs Act changed the landscape of taxes for second home owners and how they can take deductions. Specifically:

  • A new cap on mortgage interest deductions for second homes: The new law lowers the amount of mortgage interest (including interest on a second home) a homeowner can claim from $1 million to $750,000.
  • A new cap on property taxes: This deduction is now limited to $10,000 for property, state, and local income taxes on all properties.

If your second home is designated as a vacation home, the best way to maximize your deductions (not to mention your income) is to rent your home out as much as possible. If you only use the home two weeks a year (not counting days you spend improving the property), then the income you generate is still considered taxable.

Vacation home insurance

If you rent out your second home, you’ll need a policy that covers vacation rental use of your home instead of regular homeowners insurance. Always discuss your options with a professional insurance provider so that you are adequately covered and can find the best policy for you.

Homeowners insurance vs vacation rental insurance

Let’s say you have friends over for a barbecue. One of them is leaning against the porch railing when it suddenly comes loose, causing them to fall off the porch and injure themselves. Your homeowners insurance would likely cover any medical expenses and potentially any legal expenses.

Classic homeowners insurance covers:

  • Dwelling: Damages resulting from things like fire, wind, and hail.
  • Other structures: Damage to things like sheds or detached garages.
  • Personal property: Reimbursement for damaged furniture or electronics.
  • Liability: Protection in the case of guest injury or a claim against you.

Because a vacation rental is considered a “business” (your guests are paying you to use your home), anything that occurs during a guest’s stay would be considered commercial activity. So if a similar scenario played out at your vacation home, you’d be held liable as a business owner and would require a different policy.

Insurance that covers vacation rental activity will often be an additional cost (and may have to come from a different insurance provider). We’ve partnered with Assurant to provide comprehensive yet affordable protection for Vacasa homeowners. Assurant’s coverage includes:

  • Ample liability coverage: If a guest is injured on your property and sues, this will help protect you from any ensuing medical or legal expenses.
  • Coverage for minor damages: Things you may normally pay out of pocket in a primary home—a wine spill on the carpet or broken dishware, for example.
  • Damage protection: A good thing to have just in case there’s any damage by guests to your property (like a broken window).

In addition, special natural disaster insurance may be necessary for homes in flood, tsunami, or hurricane paths, or for homes in areas susceptible to earthquakes.


Vacation rental permits and fees

Depending on where you buy your vacation home, the area may require specific permits in order for your vacation home to be considered legal. A good vacation rental management company may help you navigate the legalization process. Otherwise, you should speak with the local county or city officials to learn what is necessary.

Check to see if you need any of the following in order to operate a vacation rental:

  • Business licenses
  • Vacation rental permits
  • Transient occupancy tax certificates
  • State licenses
  • Tax registrations with the state tax collector or the Department of Revenue

These may also require specific fees (usually paid annually), such as:

  • Business license or business tax fee
  • Vacation rental permit fees
  • Inspection fees
  • Tax application fees

How to make the most of your vacation home

When you’re shopping for a vacation home, consider how location and key amenities will impact its appeal to your future guests—and how much you’ll earn. For example, there’s a significant difference between how much you can charge for an oceanfront home compared to just one a few blocks away. And if you buy a home where it’s impossible to install a hot tub, you might undercut your earning potential before you even start renting.  

Here’s what we recommend you keep in mind:

Location

  • Views: Most people don’t have a sweeping vista of the ocean or mountain range in their primary home, so they’ll pay a little more for a great view on vacation.
  • Ski-in/ski-out: In a winter market, nothing is more valuable than immediate access to the slopes.
  • Beach access: A coastal home will be more appealing (and make a lot more money) if it has immediate beach access.
  • Parks: Vacation homes within easy reach of amusement parks are a huge draw (whether that’s a quick drive or a shuttle in a resort community). And if you’re considering buying near a national park, choose a property close to a prominent year-round entrance to maximize your marketing appeal.
  • Seasonal appeal: Make sure that the home you are choosing is in an area that draws guests year-round, and that the home is easy to access regardless of the time of year. For example, Telluride is an excellent vacation rental town because it offers year-round recreation (an excellent ski resort in the winter and a very active festival season in the summer). Hawaii and the Gulf Coast are two other great examples, since the weather is relatively pleasant all year.
  • Seasonal access: If you do choose a home in a seasonal market, make sure it’s still fairly easy to reach. For example, a cabin tucked away in the woods is charming in theory, but not if the roads are impassable December through March.

Home amenities

Dog-friendly: It pays to allow four-legged guests—we see an average of $6,500 in increased revenue for dog-friendly rentals. While shopping for your second home, ask about any HOA or community pet policies. And remember that special touches like a fenced yard could make your home especially appealing to travelers with pets.

Hot tub: When our owners ask how they can earn more income, our first recommendation is to add a hot tub—we'll even help finance and install them for most Vacasa homes. Guests search for hot tubs more than any other amenity, other than pets. (This applies in most markets, but if you buy a second home in an area with year-round warm weather, a hot tub won’t pack the same punch!)

Internet: Modern travelers expect Internet access, even in remote mountain cabins, and we recommend providing it whenever possible. If you're buying a secluded getaway, remember to ask about connectivity.

Other popular perks include swimming pools (private and community), fireplaces, and washer/dryers, so if you're looking to earn the most possible rental income, add those amenities to your wish list.

Read our 10-step guide on how to make money on a vacation rental.

Managing your vacation rental

If you do choose to rent out your second home as a vacation rental, there are a few different ways you can choose to take care of it (and your guests).

Self-management

If you have a flexible schedule, enjoy doing handy work, and live fairly close to your property, then self-management may work out for you. Keep in mind, however, that while it may seem like you can save some money if you take care of everything yourself, there’s a considerable expense in time, energy, and late-night phone calls when a guest can’t figure out how to connect to the WiFi.

Here’s what you’ll be responsible for when you’re self-managing your vacation home:

  • Marketing and advertising
  • Photography
  • Writing descriptions
  • Responding to reviews
  • Website listing fees and subscription costs
  • Staging and interior decorating
  • Housekeeping, including stocking cleaning products, laundry, and guest amenities
  • Indoor and outdoor maintenance (everything from repairs to landscaping)
  • Handling reservations, inquiries, and check-ins
  • Processing payments
  • Issuing refunds
  • Communicating with concerned or unhappy guests
  • Rate setting and optimization
  • Filing lodging taxes
  • Securing permits and licenses
  • Keeping up-to-date on HOA policies and other community regulations
  • Managing vendors and payments for miscellaneous services (such as hot tub or pool maintenance and cleaning, snow removal, etc.)

Booking services

There are some companies who provide an option between full-service vacation rental management and self-management. They will usually take care of advertising your home, processing payments, and potentially answering online inquiries.

However, the on-the-ground tasks like housekeeping, maintenance, and most guest support will still fall to you (or contractors you hire and manage on your own).

Full-service vacation rental management

If you live far away from your second home, or don’t have the time to worry about all the details, then a full-service vacation rental management company like ours is your best bet. We’ll take care of all the details for one comprehensive fee—everything from marketing to maintenance to on-the-ground guest support—without you needing to lift a finger.

Elevated vacation rental management: the Vacasa difference

When you’re ready to purchase a second home, we’re here for you from start to finish.

We have a network of preferred real estate agents who specialize in vacation rentals. They can help identify homes that will deliver above-average financial performance, and work with our local representatives to navigate the local regulations and taxes you’ll need to consider before you buy.

When you’ve chosen your perfect vacation home, our interior design team can take care of furnishing your rental to make it exceptionally appealing to future guests. And our local team will take care of all the permitting, photography, and other details you need to get your new home set up as a successful rental.

Of course, you’ll still be able to enjoy your own vacations whenever you want—we don’t put any limits on how you use your home, and we don’t lock you into any long-term contracts. And when you come to visit, our local team will have your home sparkling clean and ready for your own vacation.


Note: In some states, Vacasa operates through a licensed subsidiary that may offer additional real estate-related services.