We’ve all been there.
We’re on vacation. The beach is gorgeous, or the ski slopes are amazing and for a moment we think, “I could have a vacation home here.”
For most people, the appeal of owning a vacation home is simple: it’s a place to get away from our fast-paced lives while we create memories with our loved ones. Having a stake in your “happy place” seems like it would create endless possibilities for rest and relaxation.
But hang on.
The biggest question is the feasibility of carrying two mortgages and covering all the additional costs of owning a home. What if the boiler at the second home goes out? What if the basement floods?
The same issues you face at your primary residence could come into play at your “happy place.” Do you have enough financial security to cover these unforeseen expenses for TWO homes?
Of course, the simplest way to purchase a second home would be in an all-cash transaction. However, few people have funds to make that happen. This means that you’ll be looking at a second home mortgage.
Here are a couple of things you should know:
- While the interest rates are slightly higher than a primary home, you only have to put 10% down on a second home purchase with the other 90% financed by your lender.
- Additionally, while the lender underwrites and approves the loan based off your income – they allow for Airbnb rentals to offset the cost of owning the second property.
Looking at areas such as the mountains, which has appealing weather for most of the year, allows you to get creative on how to offset the costs of second home ownership with rental income. But be careful! Renting your vacation home comes with a new set of problems.
- Who will manage the property for you?
- Do you feel confident that you’ll receive consistent rent?
- Does the HOA for your second home allow short term rentals?
The list goes on.
Putting the property in an LLC
Another great option when buying a second home is putting the property into an LLC. By putting the property into an LLC, you’re able to draft an operating manual for those using the house. Nuanced topics such as who can use the property and when, who’s responsible for maintenance and costs if things break, etc., can all be written into the LLCs bylaws. This also helps with future distribution of the property should the original owners pass away. With all the complexities that sharing things with family can bring, putting the property in an LLC can help iron out the gray areas and define who is responsible for what.
Before You Sign on the Dotted Line
Purchasing a second home has many advantages. It can be an amazing place to create memories with loved ones, a fun way to escape the hamster wheel of our lives, and a chance to buy your retirement home earlier in life and pay down the debt during your working years.
For all the advantages that second homes have, be careful of the drawbacks. The financial costs of owning a second home are obvious. Other hurdles that people don’t think about are the lack of vacation options once you buy a second home. If you’re putting all your money into this new place, you have to use it – and this new property becomes your de-facto vacation spot for almost all vacations going forward.
Finally, be honest about how much use you’ll get out of the place. Look at the costs of renting for 2-4 weeks vs. buying. Will you really be able to use your vacation home enough to justify the additional costs vs. renting somewhere for a few weeks every year?
If this is something you’ve been considering, it’s important to take a look at all the options and how they affect your overall financial plan. Working with an advisor could help you make concrete decisions about sometimes emotional questions. Before you sign on the dotted line, make sure this will work for you, your family, and your future financial goals.
Denver Private Wealth Management is an independent fee-based financial planning practice with 80+ years of experience in the financial industry. DPWM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at firstname.lastname@example.org.
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