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How much do second homes really 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
- Utilities
- Repairs
- Homeowners insurance
- Property maintenance
- HOA fees (if required)
- Furnishings/household necessities
- Property management (if needed)
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
1. Personal vacation asset for later resale
Pros:- 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
Pros:- 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
Pros:- 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
What are the mortgage and tax differences between types of properties?
When buying a second home or considering real estate investing, it’s important to know how mortgage lenders determine whether a home is considered a second home or an investment property. Expect higher interest rates, down payments and credit score requirements on a mortgage for investment properties compared to second homes.The criteria lenders use are often similar to those used by the IRS and tax professionals to determine taxable rental income and tax benefits for second homes. Tax benefits for investment properties include deductions for rental expenses, depreciation and losses.The following general rules apply:A second home- Must be occupied by the owner 14 days each year or more
- Cannot be used as a rental property more than 180 days each year
- Must be located at least 50 miles from the owner’s primary home
- Is used by the owner(s) fewer than 14 days each year
- May be used as a rental property for any period of time
- May be within 50 miles of your primary residence