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
- 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 resaleIf you’re buying a home as an investment but have no intention of renting it out, your purchase falls under this category.
Buying a second home to rent is a different story.
|ALLOWS YOU TO ENJOY YOUR SECOND HOME WHENEVER YOU WANT||PROVIDES NO ACTIVE INCOME STREAMS|
|AVOIDS HASSLES AND DAMAGE FROM RENTERS||REQUIRES HIGHER INSURANCE RATES BECAUSE IT’S NOT A PRIMARY RESIDENCE|
|MAY NOT REQUIRE A PROPERTY MANAGER||MAY REQUIRE PAID SERVICES FOR LAWN CARE AND SNOW REMOVAL WHEN VACANT|
|IS EASIER TO FINANCE THAN A RENTAL PROPERTY|
2. Short-term rentalRenting out a second home to short-term tenants has been growing in popularity. Here’s what you need to know about doing the same with your property.
The other way to convert a second home to an investment property is to find long-term tenants.
|CAN STILL BE USED AS A PERSONAL VACATION HOME||MAY BE MORE EXPENSIVE IF IT’S IN A POPULAR DESTINATION|
|GENERATES AN INCOME STREAM TO HELP DEFRAY MORTGAGE AND MAINTENANCE COSTS||MUST BE FURNISHED AND DECORATED UPFRONT|
|UNDERGOES FREQUENT MAINTENANCE AND CLEANING FOR GUESTS, HELPING IT MAINTAIN VALUE||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|
|MAY REQUIRE A BUSINESS INSURANCE POLICY IN ADDITION TO HIGHER INSURANCE RATES|
|REQUIRES YOU TO MAINTAIN AN ACTIVE LISTING ON A SHORT-TERM RENTAL SITE|
3. Long-term rentalLong-term rentals are like the “set it and forget it” option of the real estate world, but you still need to be prepared for the investment.
The second home investment type you decide to go with will also come with specific differences in taxes.
|PROVIDES A REASONABLY CONSISTENT INCOME STREAM||MAY NOT BE AS LUCRATIVE AS A SHORT-TERM RENTAL|
|REQUIRES LESS WORK THAN A SHORT-TERM RENTAL||PUTS MORE WEAR AND TEAR ON THE HOUSE THAN SHORT-TERM RENTALS|
|ALLOWS YOU TO VET HOME OCCUPANTS PRIOR TO RENTING TO THEM||MAY CREATE ADDITIONAL HASSLE IF RENTERS DON’T PAY|
|DOES NOT REQUIRE FURNISHING, DECORATING OR HOUSEHOLD ITEMS||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 second homes 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 to determine taxable rental income and tax benefits for second homes are often similar to those used by the IRS and tax professionals. 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