For most people, buying a second home means owning a vacation home. When you go to a beautiful place, don’t you ever have a thought, gosh, wouldn’t it be great if I own a place here and my whole family can come enjoy it every time? Or maybe, one day I would like to retire here, should I just buy a house now? Then to make it a reality is not that simple. Other than looking at your purchase power/affordability, consider all other things before your purchase such as its tax implication.
Purpose of the purchase
Everyone has different reasons when purchasing additional property on top of their primary residence. From mortgage lender and tax point of view, a second property purchase can be treated as a second home or as an investment property. Some lenders require that the second home is located outside certain miles from your primary residence to be qualified as a second home loan. Second home loan is basically the same as your primary home loan, but if its considered a rental property, it can have different requirements to obtain the mortgage. There are also different tax rules apply when you rented it out full time, short term (less than 15 days) or mixed use (use it personally and rented it out for more than 15 days in a year). Discuss it with your tax attorney or accountant for more detail information and click here for IRS publication in regards to this matter.
Location, Location, Location
Just like any other real estate purchase, location is the key, especially if you would like to monetize it. Think about a hotel room price when you go on vacation. Other than amenities and time of the year, it also depends on the location of the hotel. The closer it is to the main entertainment area, the more expensive the room cost. Same rule applies to your vacation home if you plan to rent it out to create some income.
Pros and Cons on Vacation Rental Property
With popular Airbnb on the rise, lots of people try to monetize their unused vacation home (or probably the unused room in the house). It costs money to maintain it, so might as well rented it out and make you some money, right? Unlike any regular single family home or multi-family residence, vacation home will have short term tenants indefinitely. If you plan to make money out of this vacation home, calculate your cleaning cost every time a renter/renters move out. Also advertising costs since you need to find new tenants constantly. Also you should consider the cost of the furniture and room decor; sofa, nice bed and bedding, etc. The pro is definitely with the fluctuating rental price depending on time of the year; low season vs high season. A house/condo by the beach can make you thousands of dollars in a few days or sometimes in 1 day during high season, depending on the location and amenities you provide.
Check your Fair Rental Value
To check how much fair rental value of your vacation property, you can browse through VRBO, Airbnb or tripping.com. Just like any other investment you make, do a research and calculate the costs to minimize your risk before you jump on it.