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It could be tempting to consider buying a second home as a financial investment, but first you’ll want to make sure your dreams are on equal footing with reality.
Unlike traditional investment products like mutual funds and stocks, a second home comes with costs like maintenance, insurance and property taxes.
When considering a second home for investment, conduct a simple cost/benefit analysis. Any investment comes with a measure of risk, but if your financial risks outweigh the benefits, it might not be a smart choice. However, if the opposite is true, you could enjoy the benefits of your investment for years to come.
How much is it really going to cost?
The sales price of your second home is just the first expense in your “business” as a second home owner. To truly understand the financial responsibilities of second home ownership, be sure to budget for:
- Property taxes
- Homeowners insurance
- Property maintenance
- HOA fees (if required)
- Furnishings/household necessities
- Property management (if needed)
It’s also important to consider the non-monetary costs. It takes considerable time and energy to maintain a second home and/or be a landlord if you choose to rent it out. But remember: Both the sweat equity and cash you put into a second home will likely add and could increase your return on investment.
How will you use the property?
Most people invest in second homes for one of three investment purposes:
- A personal vacation asset to hold for later resale
- A short-term rental property for a variable income stream
- A long-term rental property for a sustained income stream
Each reason has pros and cons as an investment tool, and it’s important to understand the differences between a rental home and a second home before making an investment.
1. Personal vacation asset for later resale
- Allows you to enjoy your second home whenever you want
- Avoids hassles and damage from renters
- May not require a property manager
- Is easier to finance than a rental property
- Provides no active income streams
- Requires higher insurance rates because it’s not a primary residence
- May require paid services for lawn care and snow removal when vacant
2. Short-term rental
- Can still be used as a personal vacation home
- Generates an income stream to help defray mortgage and maintenance costs
- Undergoes frequent maintenance and cleaning for guests, helping it maintain value
- May be more expensive if it’s in a popular destination
- Must be furnished and decorated up front
- May need to be managed by a property manager
- Positions you as the responsible party for guest problems, complaints, etc.
- May not be allowed under HOA regulations or local laws
- May not provide consistent income if reservations fluctuate
- In addition to higher insurance rates, may require a business insurance policy
- Requires you to maintain an active listing on a short-term rental site
3. Long-term rental
- Provides a reasonably consistent income stream
- Requires less work than a short-term rental
- Allows you to vet home occupants prior to renting to them
- Does not require furnishing, decorating or household items
- May not be as lucrative as a short-term rental
- Puts more wear and tear on house than a short-term renter
- May create additional hassle if renters don’t pay
- May sit vacant for long periods of time without viable rental applicants
Will I get a good return on my investment?
To determine how much you’ll make from your second home as a vacation home or a rental – and when you can expect a return on your investment – research rents, occupancy rates and real estate appreciation in the area where you’re looking to buy.
Factor it all in, along with an emergency fund to pay for unexpected maintenance and mortgage payments for months with no renters, and a budget for property management, if needed. If you’re aiming for future resale, create a timeline and budget for property improvements to increase the home’s resale value.
Once you’ve calculated the costs, weighed all the pros and cons, and decided on the best way to use your property, you should have a clear picture if your second home “business” is a smart investment for you.
Pacaso offers a fourth option
If you’re looking to own a second home for personal use and enjoyment, Pacaso offers an attractive alternative. Pacaso co-ownership is true property ownership, with owners realizing any equity. The home’s value moves along with the whole real estate market. And it lets buyers right-size their purchase.
Many of the cons of whole second home ownership are eliminated with Pacaso’s fully managed LLC co-ownership model. As the manager of your home’s LLC, Pacaso assumes financial responsibility if an owner defaults on payments.
What about all those unknown costs and hassles of home maintenance and renter scheduling? Forget them. Pacaso handles all owner scheduling, property maintenance and other costs. Owner fees are low -- just 1% of ownership value. Find out more by reading our Buyer FAQs.