First-time home buyers: Consider a vacation home as your first mortgage [VIDEO]

December 9, 2019 - 9 min read

How to buy a home when you’re priced out of your city

Everyone’s buzzing about an impending “Millennial home-buying boom.”

But in some cities, especially where young professionals are moving, housing prices make that near impossible.

You can either compromise on location (buying way outside town), or exceed your budget and basically double your monthly housing payment.

Obviously, neither option is a good one.

But there are other ways priced-out buyers can invest in real estate.

One option? Keep renting and buy a vacation home instead. You could build equity, keep living in the city you love, and make some cash on the side from renters.

Sound good? Check your vacation home financing options today.

Find an affordable vacation home mortgage here

In this article:

Why first-time home buyers are choosing vacation homes

Buying a vacation home as your first property can come with serious benefits.

  • Start building equity in an area where real estate values are likely to rise
  • Make some cash on the side, if you rent the property out
  • Take vacations! Without having to pay for a hotel or Airbnb

First off, you have a permanent spot to get away to. Whether it’s in the mountains, on the beach, or just in a sleepy town along the coast, it gives you a place for some R&R anytime you need it.

More than that, though, it also gives you an added income stream.

When you’re not actively using it, you can rent your home out on platforms like Airbnb and VRBO, and bring in some extra cash.

If the home’s in an in-demand area, the rent you earn might even pay for your mortgage payment (and maybe your current rent, too).

This strategy is best for buyers located in high-cost housing markets, where buying a primary residence just isn’t feasible. You can build wealth through real estate, without having to bust your budget or move outside the city.

As with any real estate purchase, buying a vacation home also gives you the chance to build equity, which — down the line — means profits when you sell.

And since you’re still renting, you don’t have to compromise on location to do it.

Keep living, working, and playing in the city you’re accustomed to, and let your vacation property build the wealth for you.

Want to see whether you could afford a vacation home as your first home? Explore your financing options using the link below.

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Where to invest in vacation real estate

Higher priced housing markets are the best bets for this type of real estate strategy. These include cities like Los Angeles, San Francisco, Seattle, Denver, New York, and Washington, D.C.

When choosing a property, you’ll want to explore vacation spots in the surrounding region. Look for places you can easily access to 1) visit the home and vacation yourself and 2) maintain the property on a regular basis.

Here are some good vacation real estate options near the nation’s costlier markets:

  • Bay Area - Monterey, Carmel, Lake Tahoe, Napa
  • Los Angeles - Palm Springs, Joshua Tree, Santa Barbara
  • Seattle - Leavenworth, Bellingham, Snoqualmie
  • Denver - Steamboat Springs, Aspen, Fort Collins
  • Washington, D.C. - Ocean City, Alexandria, Gettysburg
  • New York - Montauk, Catskills, Cape Cod

Real estate prices should also factor in. And you should consider your tastes and interests, too.

Where would you most want to vacation to? What about your family members? Keep in mind, you’ll likely visit at least a few times a year, so make sure it’s a spot you really love.

How to buy a vacation home

Buying a vacation home is similar to buying a primary residence (one you plan to live in full-time). But there are a few key differences.

First, you’ll have more limited loan options.

FHA loans, for example, aren’t available on vacation home purchases. So you’ll need to use a conventional loan instead. These are a little harder to qualify for, as they require higher credit scores.

You may also be required to have at least a few months of cash reserves.

Expect tougher credit and income hurdles when buying a vacation home. And keep in mind that vacation home interest rates are slightly higher than typical mortgage rates.

In addition, interest rates are generally higher on vacation home purchases than they are for first home mortgages.

Fortunately, they’re still lower than rates on investment property loans, which tend to be significantly higher than market rates.

How to get low vacation home mortgage rates

It’s important to note here that you also have to use the property for your own personal vacations at least some portion of the year.

If you’re renting out the home 100 percent of time, then you have an investment property on your hands. That requires a different (and more expensive) mortgage loan.

Telling a lender you’re purchasing a vacation home when it’s really an investment property qualifies as mortgage fraud and could lead to jail time.

Find a low vacation home mortgage rate

Making the math work

To make a vacation home purchase worth it, you’ll just need to offset your mortgage payment with the rent you earn on the property.

Here’s an example.

Let’s say you buy a home in Joshua Tree for $400,000. Your monthly mortgage payment is $2,000.

By listing the home on Airbnb, you’re able to earn $200 a night. With these returns, all it takes is 10 days of renters a month to cover your mortgage payment.

If you’re not able to fully pay for your mortgage with rent, that’s OK, too.

In the above example, if you only rented the home for eight nights, you’d make $1,600. That leaves you with just $400 to pay on your monthly mortgage payment.

Find out what your monthly mortgage payment would be. Start here

A few hundred dollars per month might sound high if you’re on a budget. But remember:

  1. You’re building equity by owning the home
  2. You get homeowner deductions that reduce your annual tax liability
  3. You have a vacation property you can use whenever you like

Plus, hotels in vacation hotspots can cost a pretty penny. Just two nights in lodging could easily surpass that $400 mark (and it’d probably be less comfortable, too).

As long as you use your vacation home a few times a year, you’ll probably end up saving cash on hotel costs in the long run.

What to consider before purchasing a vacation home as your first home

Of course, buying a vacation home isn’t something you should jump into blindly. There are lots of factors to consider, including your budget, your schedule, your location, and more.

You also need to be ready to care for the property.

You’ll have to maintain it and make repairs (you want to protect that investment!), but you’ll also have to handle the cleaning and re-stocking after each renter.

You can hire a property management firm to do these things. But make sure you plan for that in your budget from the outset.

Finally, you should have some savings stowed away. There will be times when you don’t have renters (especially if the property has only seasonal demand), and you may have to cover the entirety of your mortgage costs and property upkeep on your own.

Make sure you have a financial safety net there to soften the blow should this occur.

Vacation home mortgage FAQ for first-time home buyers

What are vacation home mortgage rates?

Vacation home mortgage rates are slightly higher than the rates you would see on a loan for a primary residence. Fortunately, they’re still lower than interest rates on investment property loans. Investment loan rates tend to be much higher than other mortgages because they present a higher risk to the lender.

How much do I need to put down on a vacation home?

You’ll need at least a 10 percent down payment in order to buy a vacation home. And that’s with great credit and serious cash reserves. If your application isn’t as strong, your lender will most likely want a 20 percent down payment to protect them in case of loss.

Do I need to notify my mortgage company if I rent out my vacation home?

Most likely not, but you’ll want to check your mortgage documents to be sure. As long as you’re still using the home as your own personal vacation home (in addition to renting it out), you should still be in compliance with your contract. If you’re not sure, call up your lender and ask.

Can I buy a house and rent it out straight away?

Yes. As long as your mortgage isn’t for a primary residence, there’s no requirement saying you must move in or inhabit the house yourself right away. You just can’t rent it out full time.

Can I rent out a room in my house on a normal mortgage?

You should be able to rent out a room under any traditional mortgage contract. However, if you want to rent the entire home out, though (even on a part-time basis), that might not be allowed. With VA loans and FHA loans, for example, the property must be used as your primary residence. Renting it out would conflict with the requirement.

Vacation homes: a niche way for renters to break into the housing market

If you’ve been wondering how you’ll ever afford a house in your city, buying a vacation home may be the right move. It can help you build wealth, offer you an added income stream, and give you your own personal vacation getaway when you need it.

Are you considering buying a vacation home? Then shop around and see what mortgage rates you qualify for today.

Time to make a move? Let us find the right mortgage for you

Aly J. Yale
Authored By: Aly J. Yale
The Mortgage Reports contributor
Aly J. Yale is a mortgage and real estate writer based in Houston who has contributed to Forbes and worked for organizations such as The Dallas Morning News, PBS, NBC, and Radio Disney.