Whether you’re dreaming of a second home near the beach, looking to make a profitable investment or a combination of the two, buying a second home can have both personal and financial benefits. According to the 2018 Hostfully Market Study, there are 9 million second homes in the U.S. with 25% of them used as rentals and professionally managed.
One important aspect that will drive your purchase decision is knowing whether you plan to sublet the home or use it solely for your own. If you don’t rent it out, you’ll want to make sure to visit enough to make your purchase worthwhile. Pick a place you love and want to return often, and don’t leave the home sitting empty for long periods of time. If you chose to turn the home into a rental, run an estimate of what you can expect your returns to be and weigh them against other uses for the same money.
If being a landlord is part of your plan, you’ll need to decide between a traditional (long-term) rental or Airbnb (short-term) rental. While an Airbnb can allow you to alter your prices depending on your situation, you won’t be able to change the rent after you sign the lease in your long-term rental. A short-term rental requires dealing with your visitors directly, while the long-term will only require you to deal with tenants in certain situations.
In real estate investing, different locations yield different return on investment. That’s why it’s vital to do your market analysis when purchasing a property, especially if it’s located out of state. For great appreciation potential, keep your eyes peeled for areas that are up-and-coming. Here are some questions to ask yourself:
• Are there new shops and restaurants opening in the area?
• Are there future development plans or new business hubs coming?
• Is it close to public transportation?
• Is it near a decent school district?
• Does the area have a high occupancy rate? Meaning, is there a large pool of potential tenants to rent your property to?
Even if you decide to use the property strictly for yourself, it’s still a good idea to choose one with desirable amenities which can significantly impact not just resale value but what you can charge in rent.
Is there a swimming pool, fireplace, entertainment room, or gym?
Are there updated appliances (washer/dryer, dishwasher)?
Is there covered parking? Is there guest parking?
Is there a place for outdoor play? Is it child and/ or pet-friendly?
Aside from the purchase price of the home, you will also be responsible for association fees, property taxes, insurance and costs of furnishing the home. In some cases, you may need to hire property management or a booking agency to manage your rental (especially out of state properties or short-term rentals). You may need to budget for a reliable cleaning service if you decide to turn your home into an Airbnb.
Keep in mind that not all homes can be used as a rental. Make sure to do your due diligence when it comes to rules for rentals set by homeowners’ associations. It’s especially important to research all these rules before you buy!
The three main ways to purchase a second home or vacation property are:
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A cash-out refinance on your primary home;
A HELOC (home equity line of credit) on your current home; or
A conventional loan on the second home itself
The National Association of REALTORS® says that about one-fifth of buyers tap into equity from their primary residence to make the down payment on the second home.
You can buy a primary residence with as little as 3% down in many cases, but it takes at least 10% down to buy a vacation home, and that’s if your application is very strong. Otherwise, your lender may require at least 20%.
Rental homes and vacation properties are financed differently. If you can qualify for your purchase without the property generating any rental income, buy it as a vacation home. You’ll get a more competitive interest rate, and qualifying is more straightforward when rental income is off the table. However, if you need to rent out your place to afford it, it becomes an investment property, not a second home. In this case, your lender will ask to see an appraisal with a comparable rental schedule.
Depending on how you intend to use your second home, it’s important to speak with your tax advisor to determine tax implications for this investment. If you turn it into a rental, you will be required to pay taxes if you use it for more than 14 days in a year or more than 10 percent of the days it’s rented.*
Is a rental the same as a vacation home?*loanDepot.com, LLC does not provide legal, investment, accounting or tax advice, please consult a licensed attorney, financial planner, CPA or tax professional on these ‘tips’ and any information or opinions contained herein.
Curious what renovations will attract good tenants, while also increasing the value of your property? Try to achieve a balance between investing enough to boost property value without spending too much on the things that won’t provide a return. loanDepot offers a wide suite of Renovation Loans which can allow you to lump the cost of repairs all into a single mortgage payment.
Whatever your objective, remember to stay the course and don’t let impulsive decisions derail your hard work toward your wealth-building goals. A loanDepot Loan Consultant can help you answer any mortgage-related questions about purchasing an investment home.
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