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6 Questions to Ask Before Buying a Vacation Home in Redondo Beach

Homes on Redondo Beach_strand at night

From beachfront homes and condos, to properties within walking distance to the beach, restaurants, shops and entertainment, buying a vacation home in Redondo Beach can be the ultimate dream for those who want to experience seaside living first-hand. While vacation homes can be a worthy investment, however, some people often seek to purchase of a second home without fully considering the financial and time commitments involved. To know if you’re truly ready to buy a vacation home, answer these six key questions first to see how prepared you are to take the plunge.

1. Why do you really want to buy a vacation home?

Before you even begin looking for the ideal vacation home to purchase, you should first consider your reasons and goals for wanting one. For example, how much do you plan to use it personally, and what will you do with the home the rest of the time? Some of the most common reasons people buy vacation homes include having a place to stay in a favorite travel spot, as well as an eventual retirement home, as well as securing an investment that can be rented out to cover the mortgage and property taxes, and later to sell for a profit. Take note: If it’s a personal vacation home that you have an attachment to, don’t rent it out; and if it’s an investment, keep your emotions separate because it’s a business.

2. Do you have time to manage a vacation home?

Some homeowners underestimate the time and work involved in owning a vacation home. These tasks can include marketing the home; placing listings on travel booking sites; keeping up with the maintenance; dealing with guests checking in and out; and handling guest requests. In fact, VRBO estimates that homeowners spend about seven hours a week managing a vacation home. Self-managing a property also means being on call 24 hours a day in case renters have any questions or problems, from broken air-conditioning to non-working Wifi.

3. Will you self-manage the rental, or hire help?

Although some owners of vacation homes might enjoy handling the management process themselves, hiring a property manager can be well worth the expense. To determine if a management service is worth it, owners should add up how many hours per week they spend managing their vacation home, and then divide the hours by what a property manager would cost. Even if you don’t plan to rent out the home to vacationers, hiring a property manager to keep an eye on the home when you’re not there might be a good idea, especially if you live far away. This will ensure that the home stays clean and in top-notch condition.

4. Do you want short- or long-term renters?

While renting out your place via a vacation-rental website might be the most lucrative option, it can have some downsides. Among them: more expensive cleaning fees, additional wear and tear on the home, and sometimes, frequent vacancies during the off-season. Don’t want to deal with short-term vacationers? Try to rent to a long-term tenant. Keep in mind, however, that finding longer-term renters can be tricky, especially if the home is situated in a popular seasonal travel destination where long-term renters can be few and far between. Long-term renters also take away some of the flexibility that vacation home owners often enjoy, limiting how often you could enjoy the home yourself if a tenant signs a six-month or one-year lease.

The bottom line: If you want your rental to remain profitable, as a general rule it should earn at least 1 percent of its purchase price per month. For example, a $100,000 home should rent for $1,000 a month for a good return, while the net operating income for short-term rentals should be about 20 percent higher than the carrying costs.

5. How much will this vacation home cost to maintain?

Just like any other property, a vacation home comes with a mortgage, taxes and insurance, but there also likely will be additional costs in the form of maintenance, repairs, utilities and other locality-specific charges. Turning the vacation home into a short-term rental can incur even more expenses, such as cleaning fees (which could be $90 to $150 per session, according to Home Advisor); home maintenance (typically 1 percent to 4 percent of a home’s price; insurance premiums (which could be as much as 15 percent to 20 percent higher); property management (usually costing 10 percent to 40 percent of the gross annual income); and homeowner’s association fees (which can vary anywhere from $150 to $700 per month). Vacation home owners would be wise to factor additional costs into what they plan to charge to rent out the home.

6. What are the tax implications of renting out a vacation home?

The taxes associated with vacation homes can be complex. They also can vary based on how the property is used and how much time it is used personally versus being rented. It’s always best to talk to a tax professional about your unique financial situation, but here’s an overview from the IRS of what to expect.

  • If you receive rental income for the use of a dwelling unit, such as a house or an apartment, you may deduct certain expenses: These expenses—which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation—will reduce the amount of rental income subject to tax.
  • If you’re renting to make a profit and don’t use the dwelling unit as a residence: Your deductible rental expenses may be more than your gross rental income. Your rental losses, however, generally will be limited by the “at-risk” rules or the passive activity loss rules. For information on these limits, refer toPublication 925, Passive Activities and At-Risk Rules.
  • If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct: You’re considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of 14 days, or 10 percent of the total days you rent it to others at a fair rental price. It’s possible that you’ll use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the remaining 30 days of the year, your vacation home also is a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year.

Note: A special rule applies if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.

  • If you use the dwelling unit for both rental and personal purposes: You generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes and casualty losses, as well as rental expenses like realtors’ fees and advertising costs). However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year. If you itemize your deductions onSchedule A (Form 1040 or 1040-SR), Itemized Deductions (PDF), you still might be able to deduct your personal portion of mortgage interest, property taxes and casualty losses from Federally declared disasters on that schedule.
  • If you have a rental income: You may be subject to the Net Investment Income Tax. details, refer toTopic No. 559.
  • Additional Information: For more information on offering residential property for rent, refer toPublication 527, Residential Rental Property (Including Rental of Vacation Homes), and for additional details on residential rental property income and expenses, check out Topic No. 414and Is My Residential Rental Income Taxable and/or Are My Expenses Deductible?