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Should You Buy a Lake House?

Some points to consider before buying that vacation home.

By Jason Ramage, CFP

Between the Great Resignation and a wave of retiring boomers, the COVID-19 pandemic is causing many of us to re-evaluate quality of life over other ambitions. In your eagerness to squeeze some lemonade out of this corona-lemon, you might be tempted to buy a boat or finally make a down payment on your dream lake house.

Jason Ramage

Jason Ramage

Maybe for you it’s not a lake house, but beachfront property, a mountain cabin, or your own island approximately ten miles off the coast of Dominica – who hasn’t browsed Private Islands Inc. just to see what’s up?

Yet, owning real estate is real responsibility, so here are some thoughts to think through your next steps.

Starting with Why

Take time wherever you do your best thinking – morning shower, journaling, talk it out with a spouse or friend – and get into why you have this dream. Imagine yourself there on a random Thursday morning. Are you working remotely? Hosting family on vacation? Painting or writing?

Everyone enjoys a scenic shoreline view. Learning your reasons narrows down the list of homes that are a good fit. Plus, this exercise expands your possibilities to see other ways of getting what you really want. For instance, you might find more affordable property on a riverside, rural acreage, or in a small walkable town that provides the experience you’re after without the premium price tag.

Planning for Expenses...

Your mileage may vary (widely), but I’ve seen anywhere from 1-2% of home value suggested as a guideline for maintenance expenses. For a $500,000 property, that’s about $10,000 per year. Consider adding homeowner’s association dues and assessments for roofing, paving, and other projects. In some cases, your insurance responsibility may be limited to the home interior, which helps offset that cost.

Property taxes vary considerably across states and from one county to the next. Most homeowners receive a considerable reduction on their tax bill thanks to a homestead exemption. Be prepared to foot the entire cost on your lake home.

Insurance for a typical residence runs $400-500 per $100,000 of value. A second home can easily cost twice as much, especially if you plan on renting it out. Amenities like a pool and shoreline are costly to insure. Risk of flooding and theft might also be higher.

Sharing a home with family or friends can work out well; be sure to set clear expectations and roles. Also be prepared to buy someone out when they change their minds.

However you slice it, you want to feel comfortable covering all expenses without help from rental income or cost-sharing. If your budget feels tight or you would have to withdraw from retirement or rainy-day funds to make it work, focus on your financial foundation first. Stretching yourself too thin won’t make for an enjoyable experience.

…and Income

The cool thing about your dream lake house is you can more easily rent it out without having people up in your personal space. Be diligent about keeping all your records from the beginning and hiring a tax pro familiar with rental property. Our tax code gives us a couple interesting ways to work the system.

You can limit your personal use to 14 days per year to claim the full amount of eligible expenses against your rental income. This works out well if you typically visit a certain spot once per year and wouldn’t have much reason to go there otherwise.

Alternatively, you can limit rental time to two weeks per year without reporting the income. Many cities have annual events like Louisville’s Kentucky Derby that draw peak tourist demand. While this means your expenses are not deductible either, in most years (barring a pandemic) you might cover the year’s property tax bill from one week of tax-free rental income. Consider this plan if you’d rather avoid renting most of the year.

In between, you can deduct some expenses based on how much time is personal use versus rental. Did I mention hiring a good tax pro?

Try Before You Buy

In today’s sharing economy, it’s easy to try things before we commit to them. Try booking an extended stay on Airbnb or VRBO in different locales and types of homes. Treat it like time in your future lake house. This is how you learn what you like – and all the little things that drive you nuts later!

Housesitting is an interesting option thanks to sites like TrustedHousesitters and House Sitters America. If you have the flexibility to “slow travel” and like the idea of looking after someone’s home in return for room and board, this can be a great fit. You can build your reputation by accepting house sitting gigs in your local area. This is especially helpful if your job or other obligations don’t allow you to travel.

Just Move In, Already

Finally, if your life can be arranged to make it work, maybe your “vacation home” becomes home. This is especially worth doing if you have substantial gains, as making a house your primary residence for at least two years helps qualify for favorable tax treatment.

Hope this gives you some ideas before making your move!

About the author: Jason Ramage, CFP®, ECA

Jason Ramage is a Paraplanner for TouchPoint Wealth Partners in Cincinnati, Ohio, a Member Firm of Valmark Financial Group. He sees financial planning as empowering people to develop a positive relationship with their money. He enjoys the adventure of raising a family, board games, cycling, camping, and exploring Japanese convenience stores.

This article is for informational purposes only and is not intended as investment or tax advice. Please consult with an advisor concerning your personal situation. The author owns shares in Airbnb (ABNB) mentioned here.

Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor

Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 1-800-765-5201. TouchPoint® Wealth Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

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