Most importantly, can you afford a second home? If you’re having difficulty maintaining and keeping up with the expenses of your primary residence, a second home will only further create strain. Can you afford a second mortgage? Can you afford insurance? If you plan on being at the property sporadically, can you afford its upkeep when you’re not present? While vacation homes can be lucrative investments, you will likely have to sink money into the property long before you start to see sizable returns.
Let’s talk taxes. Come Tax Day, you’ll need to do additional work when it comes to your second property. In many regards, the taxes on primary and secondary homes are similar, but there are some distinct differences. Particularly when it comes to renting out your second property. If you choose to rent out your second home (which is a very popular choice among secondary home owners) you will be on the hook for a considerable amount of additional paperwork. Be mindful that all rental receipts must be reported to the IRS as income. You are however allotted 15 days to rent out the home without penalty. Any amount of time surpassing 15 days, and you will need to report the property and its income to the IRS. Unlike your primary residence, all profits from the sale of a second home will be taxed as capital gain. In certain circumstances, you may be eligible for write offs. Although, it’s best not to bank on getting significant tax exemptions.
What are the benefits and drawbacks of renting out a property? It is assumed that when you buy a secondary property, you will typically spend less time at that location than your primary residence. Many people who own multiples homes choose to live in one place during the warmer months, and a secondary property during the colder months. If your secondary home is sitting dormant for a significant amount of time during the year, it may be worthwhile to rent it out. Or perhaps you are looking to buy a property for the sole purpose of renting it out. Either way, you can potentially generate a sizable profit from the home when you’re not actively using it.
Beware of the unforeseen responsibilities associated with renting out a home. A vacation property will require upkeep, particularly if you want to make it habitable for renters when you’re not there. Certain climates, like the beach for instance, require a lot of upkeep from the natural wear and tear associated with location. If you want to have a successful rental property, you’ll need to invest a certain amount of money to keep the home functional. Where is your second home located in proximity to your primary residence? Is your secondary home in a popular tourist location? This can make a significant difference if you depend on the income from renters to keep your secondary home functioning. Certain areas won’t be as lucrative simply because they don’t draw in a large amount of tourism. Any issues that arise with the home, will be your responsibility to fix, as is the case with your primary residence.
If you choose not to rent out a secondary property, be prepared to funnel money into upkeep, regardless. Some people may believe that if a home is not being actively used, it won’t need consistent attending to. Like any other building, there will be necessary upkeep required regardless of how often the home is used. You will still likely need to have people check on the home periodically, particularly if you have landscaping and/or exterior needs to attend to. This is especially important to keep in mind if you live in an area where there is a strict Home Owners Association (HOA). Many HOA’s have rules and regulations, regarding exterior appearance, that will result in consequences if ignored. You will likely need to contract out workers to help keep the house within regulations.
Do your research before buying a property. Just because you love visiting that California coastal town, doesn’t mean you should buy a vacation property there. A vacation property comes with far more responsibility than people often realize. You will need to learn about local laws and ordinances that may vary drastically from where your primary residence is located. Certain cities have unique rules when it comes to renting out properties, particularly if they receive heavy tourist traffic. Utilities and cost of living can be significantly different depending on where you buy. A dreamlike vacation home can shortly turn into a nightmare if you fail to do the research beforehand.
Speaking of research, get to know the culture of the area before you buy. Living in an area and vacationing in that area are vastly different experiences. We can easily get caught up in the beauty of a location without realizing that everywhere worth living has drawbacks. You may come to realize that while the location is beautiful, you’re not a fan of the culture. Maybe the politics don’t align with what you prefer. If you’re planning on spending a considerable amount of time at your second property, don’t impulse buy. Rather, allow yourself the opportunity to visit multiple times before jumping into anything contractually binding. A second home is a large undertaking, and should be treated as such.
When getting serious, speak with a local real estate agent. A reputable real estate agent will be able to take you through the process of buying a home in that specific area. They will have the knowledge necessary to give you the local perspective, and guide you to make the most practical decision.
Consider alternatives to full ownership. Buying a secondary home is a big undertaking, and not everyone is prepared to take the plunge. There are other alternatives at your disposal if you’re looking for a bit less responsibility. You can always go the route of shared ownership, and split the costs among various shareholders. This will help alleviate some of the financial burden, so that one individual isn’t the only fall person for any damages. Timeshares are also a popular alternative, and can be less expensive depending on what company you choose to buy through. Timeshares also eliminate the primary responsibility of maintaining a property.
A vacation home is a lot of responsibility, but for many, a worthwhile investment. Overall, it’s up to you to decide whether a secondary home is worth it. Much like buying a primary residence, there are many variables to consider. In certain ways, buying a secondary home requires even more research and flexibility.