The pros and cons of owning a second home
Many of us dream of owning a second home, whether it’s a cozy lakefront cottage, a rustic cabin in the mountains, or a posh condo in a private coastal enclave. We envision a place where we can invite family and friends to relax and share special moments, as well as a personal retreat where we can escape the frenzied world, unwind, and create lifelong memories.
Like most things in life, there are pros and cons to owning a vacation home. But deciding whether now is the time to take the plunge isn’t something you can do based on emotion alone. Thinking through the upsides and downsides will enable you to make a decision that’s right for you right now—or down the road.
First things first. Potential buyers shouldn’t consider the purchase of a second property if their job security is in question or if it compromises financial goals that are higher on their own list of priorities (like sending kids to college or funding retirement accounts, perhaps).
If you’re comfortable with these things, then your first decision is location. Don’t think of buying a vacation home until you’ve visited an area a few times. Chances are, however, based on your travels and your goals, you already have this covered. For example, you’ve been going to Hawaii for years and decide it’s where you want to buy a second home. You may have selected the island, such as the Big Island of Hawaii, but where do you buy on the island? Do you want an oceanfront condo within steps of the water, or a place up on a hill overlooking a golf course with a great view of the coast?
It’s best not to limit yourself. Keep an open mind, and ask your real estate agent to show you properties in different areas. You might be surprised by your final decision. Using the Hawaii example, you may decide the cost of maintaining an oceanfront home is too high. The salty sea breeze can erode equipment and appliances, so you must work harder to keep everything in tip top shape. Moreover, expensive flood insurance is often required for properties near the water. On the other hand, if you have the financial means, you may decide you just can’t live without the sound of the crashing waves right outside your window.
Understand Your Overhead Costs
Beyond the expenses involved based on location, be aware of all costs involved—property taxes, association fees and special assessments, insurance, repairs, and utilities. Keep in mind that you might need to spend more on maintenance than you do for your primary home. Service fees may be higher in a vacation community, and, if you’re a DIYer, consider that fact that you might not have the time or be around when a repair is required. Be prepared to spring for a handyman or a specialist who’s already on location, such as a plumber.
Know the Tax Benefits and Pitfalls
Talk to your accountant before buying a second home. Investopedia.com cautions that “keeping a second home is a step up in magnitude because a second home has all the costs (often more) of your first home without the easy write-offs from the IRS.” There can be financial benefits, but you will need to understand current tax rules surrounding second homes, vacation homes, and investment-class second homes. Different rules can apply based on how you use the property. If you plan to use the home as a rental, then you need to be aware of all the tax implications, so you can maximize your deductions to the greatest amount possible.
Owning a vacation home makes sense for many individuals and families. If you decide to move forward, do it because you want to enjoy a second home. Don’t do it based on the assumption that you’ll make money on the property. Real estate does tend to grow in value over time. According to the Wall Street Journal, “The average annual gain over the past 40 years has been about 6.4% nationwide, says the National Association of Realtors,” but remember, there are no guarantees when it comes to investments.
A Place for Retirement
Going into a second home with the right mindset may be a boon come retirement. Look for a location where you want to retire and live for several years. Keep in mind proximity to quality healthcare and shopping. And don’t get caught up on having a huge place for all the kids (and grandkids) to stay at once unless you have deep pockets and are not worried about living on a fixed income. It’s far cheaper to spring for a hotel room for guests from time to time than to carry the cost of extra living space that sits vacant most of the year.
Should I Use My Second Home as a Vacation Rental Property?
It sounds great, doesn’t it? You can generate revenue and offset out-of-pocket expenses—mortgage, property taxes, insurance, association fees (if applicable), and upkeep—by offering up your second home as a vacation rental property when you’re not there.
Make sure you understand what’s involved. Most people who rent out their homes use a property management company, which will typically collect a fee of as much as 30 percent of the rental fee. Plus, property insurance for vacation homes is often higher when they are used as rentals. Maintenance can also go up. Touch-up paint for chips and dings from luggage, and new pillows, towels, and bedding will be required on a more frequent basis. Repairs will need to be timely. For instance, if the air conditioning system breaks down on the weekend, you may be required to pay expedited repair fees, otherwise, renters may demand a reduced rate to make up for the lack of AC.
Last but not least, if you’re planning to generate rental revenue from your vacation home, be sure to analyze nearby vacation homes, talk to local agents and vacation rental companies, and look online to see what’s renting and for how much. And don’t forget to research occupancy rates. How often people are renting is important, too!
By Annette Brooks