Vacation homes might be a warm place

Many of us have taken a vacation and found an idyllic spot where we’d love to retire, spend the weekend or telecommute.

Some people have actually bought property spontaneously while on vacation — and while that’s not always a horrible idea, it is better to have a strategy.

Finding a relative bargain on vacation property involves research and a solid knowledge of your own finances. It involves knowing something about the market, too. Some thoughts:

Who else is buying? Any real estate purchase involves a market analysis.

Don’t assume that just because the residential market is in trouble, that vacation real estate necessarily falls into the same category.

Thanks to our wheezing dollar, keep in mind that in some areas of the country, foreign buyers are a factor.

If you like the area and the property, talk to real estate agents, residents and other people who know the town well, to see if you can stay ahead of the curve in making a purchase.

Know where your money’s coming from. There are plenty of people who finance second homes out of the equity from their first home, but given today’s slow real estate market, it is a risky option.

Before you even start looking for a property, think about what a second home purchase will do to your overall financial picture. First, determine the impact on your long-term financial plan. Will you be able to retire at the same age? Will you have enough money to educate the kids? Then look at your lending options. Many lenders require buyers to put down at least 20 percent on a second home. Also, keep in mind that your primary home lender may not have an interest in lending on a vacation home mortgage. While you are planning, clean up your credit first, then shop your lending options and get pre-approved. Above all, get some advice from a financial professional.

Understand what you’re buying. Even if you haven’t pinpointed a specific home or condo, you need to understand the cost and environmental issues of property ownership in a specific community.

Be aware of appreciation rates on similar properties.

If there are a plethora of “sale signs” nearby, do people want out, and if so, why?

You will need to know the potential environmental risks to your property, from hurricanes to mold.

Plan for upkeep: An unattended structure is subject to crime, as well as “wear and tear,” that can accelerate when owners are not present.

Talk to your insurance agent about insuring out-of-town property. Even though there are often qualified paid caretakers in vacation communities, they can be expensive.

You need to make sure they are bonded. Think of the worst possible scenario as to what might happen to a property, and then plan solutions — before you buy.

And, don’t forget to calculate the cost of utilities, telephone, cable, property taxes, etc. Upkeep costs can add to a surprising amount.

Is it a fixer-upper? Keep in mind that in some resort or vacation areas, property may be landmarked or otherwise legally protected, even though it looks like it is on the verge of collapse.

Before you become convinced you’ve snagged a bargain and you are ready to dial a contractor, check with local real estate agents and city administration to investigate the possible protections and restrictions on the property.

Are you going to rent or occupy? Renting out a vacation home is a good way to cover some of the cost, but lenders often factor in a 25- percent vacancy rate when determining your qualification for the loan.

Plus, you may have to play landlord with people you may never meet, and that can be risky. Rental property is a business, so treat it as such.

Talk with your tax adviser. Vacation homes may or may not offer some tax benefits to you, depending on your overall tax situation.

Ask your tax adviser to run the numbers for you. But, don’t make the move for tax reasons alone.

If your dream vacation home fits into your life and financial plan and you’ve done your research, it may be a good time to buy.

This column is produced by the Financial Planning Association, and is provided by Jennifer Lindgren, CFP. Securities and insurance products are offered through Eagle One Investments, Member FINRA/SIPC, 789-0944.