Home Business Magazine Online
Many people are looking to buy a vacation home in their favorite getaway place these days. If you are one of those people, have you considered renting it out to help finance your purchase? Interest in second home purchases doubled in 2020 over the previous year, and it’s no small wonder since we were all stuck at home during the COVID pandemic. Second homes can offer great investment opportunities as well as a change of scenery for homeowners who may be tired of the same four walls.
There are so many options to consider when buying a vacation property for investment purposes. Do you want to rent it out long term with an annual tenancy? Maybe you intend it to be a short-term vacation rental more along the lines of an Airbnb? Whichever you decide to pursue, make sure that you do your homework on both scenarios because the costs and effort involved are significantly different. Here are some of the major elements to consider if you want to buy a vacation property.
If you’re not a traditional investor in property, but buying a second property (perhaps with your principal residence now paid off), it’s important to study and seek professional advice to optimize this addition to your portfolio. You may be looking at property trusts and living wills, and sometimes these can conflict, so you’ll want to get your ownership status correct. It’s all too easy now to form an LLC in California or any other state online in minutes, but talk to your tax or law adviser to decide what is most beneficial.
Although buying a second property is a huge financial investment, you may be able to reap some tax benefits from it. You will want to consult with your accountant or attorney for the specific details, but buying a vacation home that you intend to rent out can become a deductible expense, as well as any repairs or improvements you make to the property. (Make sure you talk to your accountant because the tax implications will depend on whether your property is considered an investment or a residence by the IRS.)
Another financial planning twist may exist for those who live in insanely expensive housing markets. For some young professionals nowadays, it makes more sense to keep renting in an expensive urban area such as New York, San Francisco, or Silicon Valley — where their career is being built and where their income comes from — but also to begin to buy a vacation home that they can retreat to, or rent out while still building equity. There may be a tax advantage from deducting the days you spend in your vacation home in another state from your high-tax state liability. Again, it pays to check out the requirements for any city or state you live in or buy in.
If you’re going to be a landlord, be prepared to learn the trade, because it can be a full-time job. Management fees, tenant screening, maintenance and legal compliance are all issues to consider. If you find yourself owning a rental property with neighbors in the same situation, be aware of the “alliance model”, where owners band together to form an owner-owned rental agency. This very successful model can save costs for both landlord and tenant, and increase the attractiveness of your property.
Property management fees will be higher with VRBO-type rentals (typically around 30% versus 10% with long term). You will want to explore all of the costs involved in buying a second property, especially if you want to turn it into a rental property. It’s also a lot of work to manage a rental property, either for you or for someone else if you decide to hire a property management company. Either way, if this is your first foray into being a landlord, start learning because it can be a full-time job.
Another challenge if operating a vacation property as an absentee owner is finding local services such as plumbers, realtors, maintenance companies, property management, and even local bank financing. You will want to use local services for everything if possible, so making friends with the local realtors and bankers will be crucial to finding reputable people to hire for whatever your property needs.
Resale housing inventory is extremely tight right now, having sunk to all-time lows. And with mortgage rates at a historic low also, the housing market seems to be crowded all across the country, with more buyers than sellers and not enough inventory, so competition for an attractive property may be high. You may have to move quickly, buy a property sight unseen, or even offer way over asking price to secure a property, especially if you’re not a local. This means that patience is needed when trying to find your dream vacation home. And again, it also means developing an excellent relationship with your local realtor or real estate agent.
Whatever you decide, buying a vacation home or an investment property may be an exciting and fulfilling event in your life. Do your homework, research every aspect of it, and have fun looking at houses!