The pros and cons of buying a lake house

Stunning waterfront views and outdoor recreation are just a couple of reasons many people would love to live in a lake house. Lake life can be quiet, restorative, and inspiring. However, investing in lake houses is a significant financial move that comes with unique implications you should be aware of before putting pen to paper. We want to help you navigate these waters so you can decide if a lake home is the right fit for your lifestyle and your wallet.

Key takeaways:

• Owning a lake home can be fun and provide a good return on the investment through increased property value or rental income.
• Waterfront homes may need a lot of maintenance and require costly, specialized insurance.
• It’s important to understand all the financial pros and cons of owning a lake home before deciding to buy one.

Pros of buying waterfront property

Buying a lake house comes with plenty of benefits, even beyond enjoying the natural setting. It can be an excellent long-term investment, provide regular rental income, and, in some cases, reduce your tax liability.

ROI potential

A lake home can be an excellent investment, as waterfront homes are always in demand. Such properties likely will retain their value in the short term and can grow significantly over time. Lake home values typically peak in areas that strike a balance between high attraction and a slower pace. For example, an established summer resort town like Lake Tahoe might offer high stability, while a lesser-known lakeside community like Clearlake, California, might offer more significant appreciation over time.

A lake house can also generate income if you rent it out when you’re not using it. Some owners rent their property long enough to cover their property taxes and annual maintenance. If you’re considering this path, you’ll want to learn more about buying a second home to understand the full financial scope.

Tax deductions

Mortgage interest and property tax paid on a second residence that is primarily for your personal use is deductible as long as the mortgage satisfies the same requirements for deductible interest as a primary residence. This itemized deduction allows you to subtract mortgage interest from the first $750,000 of your home loan from your taxable income, lowering the amount of taxes you owe. If you bought your home before 2018, you can deduct the interest from the first $1 million.

Even if you rent out your second home, you can still get the deduction if you meet certain conditions. You must live there for more than 14 days or more than 10% of the days you rent it – whichever is longer. If you have multiple additional homes, you can deduct mortgage interest for only one of them.

Quality of life

Whether it’s a getaway to decompress for 2 weeks in the summer or several long weekends throughout the year, a lake house can serve as a respite from your busy daily home life.

Spending some time away at a lake house can have tangible health benefits. A survey of baby boomers by AARP showed that 73% of participants experienced benefits from travel, ranging from improved sleep to higher energy and productivity levels.

Cons of buying lakefront property

While spending a wonderful weekend at a friend’s lake house allows you to experience all the obvious advantages, owning one comes with its fair share of challenges and responsibilities. Consider the amount of work and care you invest in your primary residence, and then imagine devoting the same level of attention to a second home that might be several hours away. Here are some of the drawbacks to owning a lake house you should consider:

Maintenance issues

A home on the water is close to the elements. Humidity from the water may cause the materials your home is made of to break down. Sand, leaves, and dirt can require a lot of work to clean up, and the wind blows a little harder off a large body of water.

Additionally, a house located near water is more susceptible to storms, fog, and natural disasters. You may occasionally face an expensive repair, such as a damaged dock or retaining wall.

Other issues common with a lake house include:

• Mold
• Flooding
• Maintaining additional structures, such as sheds, docks, decks, and boathouses
• Foundational issues caused by shifting soil
• Storm damage
• Winter protection and snow removal

If you’re buying a waterfront home, ask your home inspector to keep an eye out for wear and tear caused by the elements.

High insurance costs

It’s important to make sure you have adequate homeowners insurance for your lake home, so consult with a local insurance company and schedule an appointment for them to review the property. Here are some of the key areas you should cover:

• Flood insurance
• Liability insurance: With guests and renters engaging in activities like boating, swimming, and diving, lake homes tend to have more accidents.
• Boats and other watercraft should be insured for liability and damage.
• Damage and liability issues for docks, hot tubs, and outbuildings
• Storm damage

Flood insurance

With a lake house, you should go the extra step of adding flood insurance, which is not covered under normal homeowners insurance. Local laws or your mortgage company may mandate flood coverage.

There are two types:

• National Flood Insurance Program (NFIP): With a $250,000 coverage limit, the NFIP is available only to specific, qualified communities. It’s backed by the Federal Emergency Management Agency (FEMA). NFIP won’t cover expenses incurred from staying in short-term housing until your home is safe to live in again. It also won’t cover damage to parts of your property that are not attached to the home, including boat decks, hot tubs, and septic systems.
• Private insurance: By law, private insurance must provide coverage as broad as that of the NFIP. Private insurance allows you to insure beyond the NFIP’s coverage limit. If rebuilding your dream lake home after a storm will cost more than that, private flood insurance may be the way to go.

Lakes are usually public property

Some lakes are private, owned by an individual or community that can set rules and regulations regarding its use. But most lakes are owned by a state or the federal government, meaning they’re open to the public. While there may still be rules around activities on the water, you may have to deal with people walking on your stretch of beach or swimming and boating in the waters offshore.

Before buying a lake house, get an idea of what the area is like during peak traffic periods of the summer and tourist season, when noise and activity are highest. Also ensure that lake guidelines align with your lifestyle. If you like to pull a wakeboard on a speedboat, make sure that activity is allowed.

Most private and public lakes have rules that govern behavior on the water and beaches, including:

• Access: Who can be on the lake and where boats and other watercraft can be launched
• Fishing and hunting: If these activities are allowed, under what conditions, when, and for which species
• Boating: Size of boats, speed limits, restrictions on inboard/outboard motors, whether there are no-wake rules or no-motor rules, and how you dock your boat
• Noise levels: How loud you can play music on your dock or boat, quiet hours, etc.

You might have to lease the land

Buying a lake house sometimes means you own the home but lease the land it’s built on. Utility companies, the U.S. Army Corps of Engineers, and other large organizations may own the lake itself, which means they lease out the shoreline where lakefront homes are built.

When you buy a lake house, you may inherit the remaining term of a lease to the land itself. If the lease is nearing the end of its term, you should find out how lease renegotiation went for other homes in the area. The rental agreement is likely to rise significantly to account for inflation and market value. Even if you have plenty of time left on the lease, be aware that future buyers and their real estate agents will have this in mind. It could deflate the resale value of the house.

The upside to buying a home on leased land is that you won’t have to pay property taxes. Be sure to compare the costs of the property taxes versus the cost of the land lease, as both can vary widely.

Mortgage lenders may require that a certain amount of time remain on the land lease. In these circumstances, a Home Loan Expert is a great resource for gathering additional information about land leasing.

FAQ about buying a lake house

Here are answers to some of the most common questions people have before buying a lake house.

How much money do you need for a lake house?       

You and your lender will consider the same financial questions on your second house as you did for the mortgage on your primary residence. The bank will want to examine your credit history and debt-to-income ratio, as well as the amount of cash available for a down payment. You’ll want to have high confidence that your income and savings are enough to cover the cost of a second mortgage and the considerable maintenance required on a lake house.       

Is buying a lake home a good investment?

Since lakefront real estate is a finite resource, purchasing a lake house should be an investment that appreciates over time. The natural beauty and recreational opportunities provided by the lake will ensure that demand remains high. A good local real estate agent will help you assess the property’s actual value when you’re ready to make an offer.

Are property taxes higher if you live on a lake?

Property tax on a lake home can be high for the same reason the assessed value of the house is high: The lake enhances both. County tax assessors emphasize the house’s lake frontage, land, docks, and views when determining taxable value. Talk to an accountant before buying so you aren’t surprised by a high property tax bill you weren’t expecting.

Why is lakefront property so expensive?

If you’re wondering why lake home values can be so high, the answer is simple: A lot of other people want the same thing, and there is only so much of it. When the supply of a commodity is low and demand is high, prices are driven upward.

The bottom line: Know what you want before buying a lake house

Buying a lake house is a dream for many, combining relaxation and investment potential. However, it requires a clear-eyed look at the responsibilities of maintenance, insurance, and potential land leases. By weighing the risks and benefits, you can make a choice that supports your lifestyle without compromising your budget. Understanding these financial and logistical elements can ensure that your vacation home remains a relaxing getaway instead of a source of stress.

If you’re ready to get preapproved or learn more about purchasing a second property, Rocket Mortgage has the resources to help you.

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