How to Afford a Vacation Home
Some of my most favored memories growing up took place at family vacation homes. If you’re looking to make the most of your retirement, you may be asking how to afford a vacation home. In this article we’ll cover some practical tips on how to make it work while offering some alternative solutions to fund your down payment.
Can I Afford a Vacation Home?
I mentioned my fond memories of family vacation homes growing up, and truth be told, these homes were in rural places with little economy in the area and maybe just a podunk town, but it didn’t matter. Both sets of my grandparents had managed to save enough money during their careers to purchase an affordable cabin in the woods, and it was the best.
There’s something about leaving the daily burdens of homelife to get a change of pace and scenery that rejuvenates the soul. Home is home, and we love home, but chances are home might be in the hustle and bustle of daily life. There’s the endless home improvement tasks, keeping up with the joneses, the traffic, the boring routines, the mail piling up, the screen time, etc. And as a grandparent, hosting grandchildren in your own personal home may be a bit too stressful.
If you can make it work, affording a vacation home can create a lower stress environment to spend time with family and friends, and even solitude, and make new memories. With the high cost of purchasing a home, you may be asking how can I afford a vacation home?
First, you’ll need some cash to make at least a down payment. If you don’t have a lot of liquid assets but you do own a life insurance policy with a death benefit of $100k or more, this might be your golden ticket because you have the opportunity to sell your policy to a 3rd party investor with a life settlement.
Things To Consider With Buying a Vacation Home
If you’re not familiar, a life settlement is the sale of an existing life insurance policy to a 3rd party investor through a life settlement broker. The investor typically pays a lump sum upfront in exchange for ownership of the contract. The investor assumes all future premiums and also collects the death benefit upon maturity of the policy in effort to make a reasonable rate of return. There is a wide range of investors and capital making up a multi billion dollar industry that is regulated by the department of insurance in each state.
Life Settlement Option is a life settlement broker solution, and we represent policy owners in the marketplace to seek out and negotiate for the highest bidder. The proceeds from this settlement could be used as a downpayment for a vacation home, or maybe even buy it outright depending on your case.
The amount someone receives for selling their policy typically ranges from 5% up to 70% of the death benefit, and is dependent on underwriting, the cost of future premiums, and the death benefit amount.
If you’re curious how much your life insurance policy might be worth, take 30 seconds to fill out the free appraisal form, and we’ll get back with you promptly on a valuation to see if it’s of interest to you.
In order to qualify for a mortgage as a 2nd home you’ll need income to prove that you can afford the payments. If you’re retired, this may be challenging to prove much income when you’re no longer working, however, if you apply for the mortgage as a rental property and are able to prove rental income for the area, you might pay a slightly higher interest rate, but will likely have an easier time qualifying for more money.
The reality is, the modern way of making a vacation home work is by turning it into a rental property. While it might be hard to accept that perfect strangers will be in your personal space, unless you have significant liquid assets available, you may have to hold back on hanging that family portrait over the fireplace in your vacation home, and also consider decorating from a renters point of view. You can still enjoy the property just the same, or maybe even more if you can generate a profit from it.
In the 1980s and 90s when my family enjoyed going away for a weekend to my grandparents vacation home, the home was entirely a second home for them and not a rental property. At the time, popular vacation destinations had property management and rental management companies that allowed for home owners to rent out their property. Vacation planners and travel agents would call the rental company to find out about available units, openings, and price. Your first look of the actual unit you were renting was typically when you arrived for the first time.
For my grandparents, their home was not in a popular tourist destination, so the home sat empty for many weeks and weekends out of the year. While they managed to pay property taxes, maintenance, and mortgage payments all out of pocket, they could have been covering those costs or even profiting had they been renting their home when it was not in use. How the times have changed.
Nowadays millions of vacation homeowners are using short term vacation rental sites including AirBnB and VRBO to rent out their vacation homes. At the base level, this may help to cover some of their expenses, while in others people are turning it into a retirement income business.
Getting back to that downpayment on a home. If you’re wondering why someone would sell their life insurance policy, take into account these considerations. A life insurance policy typically has a set death benefit and an increasing cost of insurance with age. In other words, the older you get, the more expensive your cost of insurance becomes on your policy. If you were to pass away earlier than expected, the life insurance policy ends up being a great investment, but the longer you live the less favorable the numbers become. Perhaps getting out of this contract by selling it provides you with not only a down payment on a mortgage, but also frees up capital to use on whatever you want. For example, perhaps your life insurance premiums are $20k a year. If you sold the policy, you’d be freed from that financial burden, and could invest or spend the money elsewhere.
If your vacation home is also a rental property, perhaps it’s even an income producing property. With a life insurance policy you’re leaving a cash asset, which is nice. If you leave a vacation home to your loved ones, not only are you leaving an asset that is likely to grow in value over time, but if it’s producing income, you’re really leaving a business and it may even be a more valuable asset to leave your family than the life insurance policy would be in the long run.
And on top of that, life insurance is something we pay into every year until we pass. There is no tangible asset until you pass away, but a rental property offers something you can enjoy now with your family. A life settlement is worth at least looking into with a free appraisal unless you really need the coverage and can afford it.
Getting back to affording a vacation home, there are important things to consider when selecting your home. While I mentioned that AirBnB and VRBO allow for homes off the beaten path to get rented, if you’re trying to turn a profit you may want to consider areas that are already showing strong renter intent. You might accomplish this by doing some research. Start with simple things like searching for best places for rental properties and see what articles and suggestions you find.
Is a Vacation Home a Good Investment?
The decision to buy a second home is one you’ll want to consider carefully. But vacation properties don’t have to be money pits. (1)
A lakehouse in the midwest might make for an ideal summer escape, but if the house would only see renters for 2 months out of the year, precisely when you’re hoping to enjoy it, maybe this option won’t work.
On the other hand, mountain resort areas have really upped their seasonal offerings to year round instead of just winter. When once, most visitors just came for ski season, now there are lots of summer activities around the town and on the mountain. Add in fall leaf season, and you may have at least a 3 season rental property.
If that’s not your scene, try considering a place with a more temperate climate, where people can enjoy a getaway just about any time of year. Things like accessibility to either an airport, large city, or both, are likely to have an effect on how much your property gets rented.
Once you narrow down some areas, start looking at VRBO and AirBnB listings to get a sense of rental properties, prices, and the competition. You could also call a property management company in the area and ask what percent of the time their properties are rented throughout the year.
In terms of competitiveness, you may want to consider what might give you an advantage to make your listing stand out. Are there a lot of 2 bedroom 2 bath rentals, but only a few 3 bedroom 3 bath units in the area? If so, you might get a lot more occupancy if your home can host 2 families instead of just 1. And try to avoid getting greedy on your price. Think of a consumer who is presented with prices and make sure yours is priced competitively if not just under the competition. If you lower your cost by 10% and that increases occupancy by 30% then of course you’ll make more in the long run. Price it too high, and you may only get renters on rare occasions. Consider proximity to the area's main destinations as location is also important to renters.
In some cases, a town might restrict the number of occupants by the square footage. In one particular town, the difference between 1200 square feet and 1700 sq feet is 6 guests versus 9 with the same number of bedrooms. You might want to do some digging to find out what restrictions are in place in a particular area, especially with some communities restricting short term rentals to a 1 month minimum.
To find out what occupancy is like in these rental homes, take a look at listings' booking calendars and you’ll get a pretty good idea of how often these places are rented. You’ll know pretty quickly if a unit is already getting bookings a year in advance that it is in high demand. On the other hand, if there’s just a couple bookings with a wide open calendar, it may just be the occasional renter that comes through. Consider that some areas tend to get more last minute bookings than others, so you’ll have to take the visitor trends of the area into account as well.
Find out from your lender or mortgage broker what they need to see to prove income for a rental property. If you can make it all work, that dream vacation home may soon be yours.
Making Your Rental Property Successful
There’s a few tricks to the trade when it comes to being a rental property host. First and foremost, your listing has to have good pictures. Aside from price and stats, pictures are what’s going to attract renters.
What’s going to make for good pictures starts with good design choices. Skip recycling old furniture and bedding, and make simple, clean design choices. You don’t need to go all out with designer furniture, but some modern looking bedding and decor can make a big difference. Avoid cluttering up the place with every nicknac that didn’t make the cut in your own home, and create a clean and open space where guests feel comfortable to make their stay their own rather than paying money to stay in someone else’s very personal space.
As a host, the success of your listing will largely depend on the reviews your renters give you, so you’ll want to create a special experience for them with extra attention given. Things like being available by phone to address any concerns with check-in or challenges with home functionality. Having high quality bedding and towels goes a long way, so again, skip using those old sheets and towels you have in storage that might chip a nipple when drying off. Guests will notice these small luxuries because many budget hotels and hosts try to cheap out with rough feeling sheets and towels, and you notice it right away. Guests notice when you’ve gone the extra mile for them, helping to justify their expensive stay and giving you a 5 star rating.
Nice lighting makes a big difference, as does having common kitchen utensils and a stocked spice cabinet. Also, having things like soap and shampoo available for guests goes a long way. I can’t tell you how many times I’ve stayed in an AirBnB only to find that there was no soap in the shower. If I didn’t bring any, I’d be making due with a rinse, and having to stop at a drugstore to get some, which is an unnecessary inconvenience that can be solved by spending a few dollars on bulk shampoo and body wash. It's these extra touches that set your unit apart.
Have your unit ready to present? Hire a professional photographer to take pictures of your property. Hey, I have a nice camera and occasionally take a great photo, but it’s worth a few hundred dollars to make your listing look like a million bucks by hiring a professional real estate photographer. Call a local real estate agent for a referral if you can’t find one online.
Nowadays, instead of dealing with keys to get in, you can have a keypad door lock installed with the ability to change the code remotely, making it easier on you and your renters to enter the property.
Many rental owners like to put out a binder with notes for everything on the property, and while this might be helpful for a reference guide, you may want to add notes to specific items around the house. Imagine you’re the renter, you’ve just traveled for however many hours, you’re excited to arrive and unpack, get settled, get food, etc. Do you think stopping all of that momentum to sit down and read the guide book to figure everything out right away is a priority at that moment? If there’s important details about the thermostat, how to work the TV, etc. then it's helpful to have instructions right next to the device.
Beyond that, make yourself available. Some renters come in and you’ll never hear from them. Others come in and will call you with unnecessary questions or notes. And sometimes things go wrong. The hot water stops working. The furnace or AC goes out. Sometimes it’s just a fuse, or a simple user error. Have a list of handymen you can call when there’s a minor problem. If something detrimental happens, like the renters can’t take showers, you may need to consider comping them for part of their stay or provide them with an alternative option. Fridge is broken? Give them a generous amount to go out to eat, etc.
If all of this is sounding like too much for you to handle, you can always hire a property manager instead, but you won’t make as much money if you’re paying someone else to do most of the work. Some people thrive on being a host because they can help a renter better than anyone else and take pride in their level of service. If you don’t live nearby, you can build a network of cleaners, contractors, handymen, and service providers to help you take care of your guests when an in-person visit is required.
Buying a second home is a big upgrade, whether you're laying claim to your favorite vacation spot or taking a first step into real estate investment. (2)
Choosing the type of renters you want renting your place can come down to a few nuances in the online rental business. AirBnB offers a larger reach with a younger demographic that may often make last minute travel plans. On the other hand, VRBO tends to have an older leaning audience that might be more likely to plan in advance. They’re often large families with children and mature adults. Some hosts may list on both sites while others prefer to use one or the other. You may be comfortable with a group of guys in their 20s having a bachelor party, while in others you feel your home and furniture is too nice to be exposed to a potentially rowdy crowd. You might describe what is and what isn’t OK in your listing in terms of gatherings to deter a party crowd. You can describe your ideal renter in your listing, and don’t forget there’s always a security deposit if there ends up being damage.
Hopefully with the sale of your life insurance policy you’ll have the capital to shift your investment towards a tangible asset you can enjoy for years to come. And perhaps these notes on how to afford a vacation home have illuminated this opportunity for you and motivated you to get started.
If you’d like to speak to a broker about the life settlement market and how much your policy might be worth, schedule a 10 minute call with us using our calendar or check out more information here on settlement options for life insurance policies.
Zack Taylor
4 years in life settlements