The vacation home landscape has changed significantly since the arrival of websites such as Airbnb in 2008 and the rebranding of Vrbo in 2019. Not only has a spare bedroom become a cash cow, but people are also learning that their second and third homes can yield a return on their investment. Rather than paying for pricey hotels on vacation, buying a vacation home can allow a homeowner the opportunity to enjoy a new city and become a seasoned real estate investor at the same time.
Although the flexibility of having multiple homes allows owners to pull off geographic arbitrage and unlock a variety of tax benefits, most people are intimidated by having another mortgage (and managing a rental property). But the reality is that owning a second home can be a highly lucrative venture and, in most states, really straightforward. This guide will explain the benefits of buying a vacation home as well as three options to consider before you make a purchase.
Investments Benefits
There are many reasons to own real estate property. Buying a vacation home, in particular, offers tax incentives, potential property appreciation, higher rental income (in comparison to long-term leases), ideal venues for gatherings, and the freedom to renovate or furnish anytime. While the latter two reasons reap benefits that might be hard to quantify, the former three are all about crunching the numbers. Let's take a closer look at two important benefits of vacation rental investing.
Tax Incentives
The tax component can vary significantly based on where the home is located. For United States taxpayers buying U.S. properties, the IRS website can explain everything from property depreciation to tax breaks for military and clergy. There are a lot of breaks on the books, which can make mortgage payments and even visiting rental properties tax-deductible. For those buying abroad, it is important to keep in mind the tax regulations in both your home country and where the property is located.
Appreciation
Simply put, appreciation considers how much the property will be worth in the future, whenever the owners might decide to sell or refinance it. Using historical data, it is relatively easy to estimate a modest appreciation rate and build a vacation rental business around those figures. The reality is that short-term rentals, which typically range from a few days to a few months, outpace the income from long-term rentals, which typically extend beyond a year. Homes in major tourist cities like Miami, Lake Tahoe, New York, and San Diego see well-located residences rent out better as vacation getaways rather than a family's home base. After crunching numbers specific to your market, it is easy to see that owning a furnished vacation home in a good neighborhood could be very lucrative.
Mortgage Rates and Down Payments
There's a lot you should know before applying for a mortgage. However, getting a loan is not as cumbersome as some might think: It just takes patience—and paperwork. Mortgage loan rates are lowest for those who have a good credit score and who plan to live in their homes all year round. Often, these owners can put down as low as 5 percent of the asking price in a downpayment. An investment property, on the other hand, can be purchased even while someone else is living in it, but the downpayment is usually between 20 and 30 percent down and those rates often reach 2 to 3 percent above primary residences.
With this in mind, many people who have lived in their primary residence for over a year see great financial benefit in buying a new home for themselves at lower rates and putting their existing home on the short-term rental market. Otherwise, if you crunch the numbers correctly, buying a second home outright could still yield great returns.
Vacation Homes vs. Hotels
Even with all the cheap hotel deals out there, hotels are still consistently inconsistent. They shut down, get new owners, and book up. Furthermore, their prices are in constant flux, making them cheap buys for a weekend away in one season and extremely cost-prohibitive in another. Also, the rules around additional guests and pets can make it hard to feel completely at home. And we've all heard timeshare horror stories.
Timeshares are typically purchased for a week or two per year, and sometimes there's the vague promise of exchanging it for access to another destination. In short, for people who want to constantly return to the same place, buying a vacation home is a smart bet.
Use a realtor to purchase a home
Just as with buying a personal residence, vacation home purchasers can check websites such as Zillow, RedFin, Realtor, and MLS to research different markets and consider price points. Once you narrow it down to a few choices, it's time to talk to an agent.
Set up a phone or video call to explain what you're looking for, hope to achieve, and want to pay. It's important to share that you plan to rent out your home so that the agent can confirm that the communities and buildings where you might be looking allow this type of arrangement. Many cities and homeowner's associations limit whether and for how long an owner can host a short-term renter, so it is imperative to verify this before buying.
If you're buying a home out of town or abroad, there are a few caveats. Consider that the title company may need you to e-sign documents or to give power of attorney to someone who can take care of this on your behalf. Also, if documents are in a language you're not entirely familiar with, hiring a lawyer, if not also a translator, is a must to provide a verified translation that you fully understand.
Co-own and get a property manager
The notion of buying a vacation home with a bunch of friends has enticed many of us at one point or another, but the idea of joint bank accounts, shared responsibilities, and conflicting schedules deter the majority.
The home is fully managed and designed specifically for co-ownership, bringing together a small group of co-owners to purchase a share of a single-family home. In this way, owners get the benefit of a timeshare but none of the hassle of management details.
Invest but don't become a landlord
Investing in vacation homes is valuable because they offer more than one way to earn a profit. But rental property management isn't everyone's thing; luckily, there are lots of ways to earn money from real estate without the traditional hassles or overhead of full ownership. The same is true for vacation homes.