Budgeting to Buy a Resort Home? Expenses Not to Overlook
From increased taxes to high prices at fancy local businesses, resort home living can be more expensive than you might expect.
Owning a home in a resort community (an area where tourism is the main economic activity) can be a dream come true. Whether it’s a vacation home or a full-time residence, the resort lifestyle offers great perks, from beautiful scenery to lots of things to do.
But don’t think this lifestyle comes cheap. Below, we explain the many expenses to plan for if you want to be financially prepared as an owner.
(Note that that this discussion presumes the resort home is in the United States. If you are looking at a home overseas, additional costs might arise, and some expenses, such as such as taxes, mortgage fees, and travel costs, could vary greatly depending on location.)
The first, and most obvious, outlay for a resort home is the purchase price. Prices in resort areas are commonly higher than homes in other areas. To get an idea of what prices run in at the resort community you’re interested in, talk to a local real estate professional. You can also take a look at sales prices for homes in the area by using real estate websites such as Zillow.com or Trulia.com (but with the caution that these estimates are done by computer algorithms using public information, and are therefore not reliable, especially for small samples).
As with any home, the purchase price of a resort home will depend partly on its size, location, and finishes. In a resort area, however, the home’s location and views can be especially significant.
Because resorts are located in some of the world's most beautiful places, those with expansive, unobstructed views of the surroundings typically fetch top dollar. In a beach resort, for example, the price tag for a home with a broad ocean view will likely be substantially higher than for a similar home nearby boasting a pleasant view of adjacent meadowland.
Also, the most desirable homes in a resort area are typically the ones closest to the area’s activities and amenities. The closer you are to a main attraction (such as a beach or ski slope), the higher the purchase price usually is. You’ll need to fork over more money for a home next to the golf course inArizona, for example, than for a similar home in the same state, but located several miles from the greens.
As with any home purchase, before you must also budget for the cost of closing expenses on your resort home. These might include loan fees, escrow and title fees, inspection reports, and transfer taxes (sometimes assessed by the local municipality on real estate sales, and common in resort areas).
Who pays for various closing costs (the buyer or the seller) is typically addressed in the purchase and sales contract for the home, and governed by custom in the area -– thus it might be different than what you're used to, if you've never purchased in this particular state before. Before making a resort home purchase, consult a real estate professional, title company, or real estate attorney in the area to get an idea of how much to budget for closing costs.
Financing Costs for a Resort Home
Unless you have the cash on hand to purchase the home outright, you will also need to budget for a monthly mortgage payment. If you’ll use the resort home as a second home, you might be faced with higher mortgage interest rates than those available for a primary residence. Typically, this happens when lenders classify a second home as an “investment property.” Whether this classification is applied to your purchase may depend on how frequently you stay at the home. To know what interest rate is applicable, consult with a lender or two before you buy.
Different Income Tax Treatment of Second Homes
If the home will be your second home (as opposed to becoming your primary residence), you must also budget for the fact that, unlike with your primary residence, the mortgage interest may not be allowed as an income tax deduction. For example, renting out the home or using equity from your primary residence for the down payment might limit your mortgage interest deduction. (For more information see: IRS Publication 936, “Mortgage Interest Deduction.”)
Also, if and when you eventually sell your resort property, if it’s not your full time residence, the capital gains taxes will be handled differently. With the sale of a primary residence, a certain amount of any appreciation realized on the sale is not taxed as a capital gain (as of 2014, the first $250,000 of appreciation, or $500,000 for a married couple filing jointly, is exempt). With a second home, however, you must pay capital gains taxes on all appreciation.
One exception to this is if you invest the proceeds from your sale in another property, and qualify for what’s known as a § 1031, or “like kind” exchange. In this case, you need not pay capital gains on the appreciation. (For more information seethe Internal Revenue Code Section 1031.)
Ownership Expenses With a Resort Home
In financially preparing to own a resort home, you must also budget for ongoing home-related expenses. As with any home, you will be responsible for the costs of utilities and any and all ongoing maintenance and repair expenses.
If the home is a second home, you should also budget for a manager to periodically visit the home during your absence, to keep an eye out for problems and make any repairs necessary. Depending on the property, you might also take on expenses for things such as gardeners or a pool-cleaning service in good weather, or driveway and walk-clearing services in snowy conditions.
You must also pay annual property taxes for the home — which can be a major shock if your previous home was in another state with low property taxes.
Real property taxes are based on the property's assessed value, but the amount levied depends on the formula used where the home is located. Find out how much the current taxes for the home are by asking a real estate professional in the area or inquiring with the municipality assessing the tax (most likely the County Assessor’s office). Keep in mind that the value of the home will be reassessed periodically (and likely influenced by the purchase price you pay).
Homeowners' Association Dues and Assessments
If the home is in a planned development (quite common in resort areas), you will also be responsible for paying dues and assessments to the development’s homeowners' association. To budget for these, find out the amount of the current dues for the home you are interested in by getting a dues statement from the property’s seller, a real estate professional, or directly from the homeowner’s association.
You should also investigate the probability of the dues rising or special assessments popping up in the future. (For more information on homeowner’s dues, see Nolo’s article “Find Out Total HOA Dues Before Buying In.”)
Living Expenses With a Resort Home
Because resort communities are typically small, and located in out-of-the way places, prices on everyday necessities are usually higher than average. Resorts cater to tourists, and typically offer more small boutique shops than large bargain stores. This means your shopping excursions will result in bigger bills.
You must also account for the need to periodically travel out of the resort area to obtain some things. For example, you might need to spend additional gas money to get to the nearest city if you wish to visit a multiplex cinema or purchase a specialty electronic item. (And that's on top of any transportation expenses just to get to your resort home if your primary home is far away.)
Taxes on the sale of goods are also commonly higher in resorts. Many resorts charge a “resort area tax” on goods and services sold in the area, in addition to any state and county sales taxes.
Resort living can also involve extra expenses due to the activities and amenities many offer. For example, keeping up with the neighbors in a resort area might mean buying new ski equipment each year, or you might discover the need for a new four-wheel drive vehicle to access back country skiing. While living at the beach doesn’t sound equipment-intensive, it can be if you get into kayaking, surfing, boating, or jet skiing.
Admission to the attractions and amenities in resorts typically doesn’t come cheap, either. For example, membership at a prime golf course might run into the tens of thousands of dollars, with each round of golf costing hundreds on top of that.
Can You Offset Expenses With Rental Income?
You might consider making some income from your resort home by renting it out when you are not using it. A real estate professional in the area should be able to advise you of how much to expect in rental fees (or you can also investigate these on real estate websites such as Zillow or Trulia).
When budgeting, however, don’t overlook the expenses involved with renting. Unless you have the ability to obtain renters on your own, you’ll likely need to pay a portion of the rental rate to a real estate agent or rental agency. You will also incur housekeeping expenses for clean up between renters. Additionally, keeping the home occupied with renters is not a sure thing -- it can be especially difficult to find renters during the resort area’s slow seasons.