Does a second home pay for itself?
You know the old expression, "If it's too good to be true, it usually is." It's kind of like that with a second home. It can be a really good investment with a variety of tax benefits or it can be a bottomless pit of stress.
Last month I talked about the good and bad aspects of owning a vacation home with other people. This week let's take a look at the financial benefits of second homes and if it is a good fit for you.
Everyone who owns more than one home has, at some point, considered the possibility of renting one of them to generate income in addition to providing a place for family vacations. Anna Maria Island is of course right in the mix of this with properties being built exclusively for rental purposes, creating discord among residents and all three island governments.
So how does the average homeowner benefit from owning a second home? The obvious thing is the income produced from renting. According to HomeAway.com and VRBO.com two vacation rental websites, the average annual rental income nationally is $28,000, a number that is probably considerably lower then what you will find on Anna Maria. In addition, a HomeAway survey from June said that 70 percent of the respondents said rental income covered more than half of their mortgage payments, and another 54 percent said rental income covered 75 percent or more of their mortgage payments.
Rental income from second homes also are used for regular living expenses, education an, of course, renovations and improvements to the property. Last year, according to the National Association of Realtors, the average purchase price for a vacation property was $192,000 and 61 percent of those were financed with a mortgage. Again, there aren't too many properties on Anna Maria Island below $200,000 so we're totally outside of the national average.
If you're one of the 61 percent who will be financing a second home, rates are usually equal to or within a quarter of a percentage point of current market rates for a primary residence with between a 10 percent to 20 percent down payment. However, if you are purchasing with the intention of renting most of the time, the lender would consider it an investment property involving tighter qualifications. For example, higher credit scores and a high down payment of approximately 25 percent would be typical. That said, qualifying for a mortgage on an investment property could be easier since lenders will include the proceeds from the rental income as part of your income calculations.
Also, if your property is established as an investment property, there are legal IRS benefits that can be taken advantage of, but will limit the amount of time for personal use. All expenses related to the property can be written off, including mortgage interest, property taxes and possibly some of the costs of obtaining the mortgage similar to a primary residence. In addition, any repairs, maintenance, cleaning, utilities and some of the realtor fees can be expensed against the property. Remember that investment properties are essentially a business, and there also will be depreciation involved, which will be a consideration when the property is sold. Naturally, a sit down with a tax expert familiar with investment property is critical before proceeding.
Finally, you have to ask yourself do you have the stomach to be a landlord, especially if it involves seasonal rentals that turn over quickly and can create problems on a weekly basis. Hiring a property management company can certainly take the pain out of frequent intrusions into your daily life, but it will also cut into your profits. Proceed with caution. It may be too good to be true.