Is a vacation home a sound investment?
A common question with a common response: It depends! It depends on the buyer the mindset, and how you make the purchase.
Owning and investing in real estate can easily get in your blood. It is a challenge to see if you can join the masses to a create prosperity by investing in real estate. When traveling to your favorite destination it becomes common ground to consider investing in a second home.
I have the good fortune to live in the sunshine state of Florida. The place many people aspire to live, the place U-Haul has recently stated is the number one location of home movers. The place that has more second homes than anywhere else in the Country. According to Bank rate there are 1.1 million second homes in Florida and for good reason. Actually, many good reasons. Beaches, golfing, sunshine, attractions, and the list goes but let’s give an honorable mention to “no state income tax”.
Many who visit Florida aspire to move here someday, usually for their retirement years. These aspiring “relocators” often start their retirement planning by investing in a second home 5-10 or even 15 years before they retire. This way they buy a property and lock in today’s buying power and let tenants make their mortgage payment while they wrap up their working years back home
Is your second home a cost or an investment.
I am a big fan of Robert Kiyosaki and I totally agree with his take on this. To find if an expense is a cost or an investment just ask yourself is this an expense, an asset, or a liability? does money go out or does money come in?
Second home as an investment (Asset)
Many people I work with desire to live here someday and want to lock in today’s buying power, so they purchase a second home as an investment. They buy a property they love. In an area that tends to rise in value faster than the national average, that they could see themselves living in for a long time. They purchase a property and rent it out to generate income making this an asset. Not only do they lock in today’s low rates, lower housing cost but they essentially let tenants pay their mortgage. When tenants pay all the expenses you now have an asset
Second home as a Liability
There are some people who do not wish to be a landlord. They buy a second home and simply come visit their home whenever they feel like it. This is a great get away and a good way to enjoy a vacation in a homey setting. A great way to enjoy a tax-deductible vacation (check with your financial planner for proper implementation of these deductions).
The challenge here is when they are not visiting these second homes, the expenses still occur. These expenses which may be well justified while they are occupying the property suddenly become a liability when the property is vacant.
The justification that the property was purchased with today’s buying power and low rates and the fact the property appreciates in value are well justified however the lack of income puts this in a liability classification.
Should you buy a vacation Home.
Hopefully the above reference is a light bulb moment as to whether you should buy a second home or not.
High risk high reward
I have a number of high net worth clients who own multi-million-dollar waterfront properties in multiple locations. These folks obviously do not generate income from these properties. They invest for appreciation and use these properties as a safe haven for their money. They consult with their financial planners and own real estate in some of the fastest appreciating locations in the world. Some of these folks buy and renovate these homes into highly sought-after mansions. This is higher risk investing with potential higher rewards.
Slow, steady and perhaps more sustainable
I am one of those safer investors who like to purchase cash flowing properties in the Sweet Spot. In a higher desirable area’s where property values will grow stronger than the national average and still be able to rent out for enough to cover all expenses. Properties that are priced at or just below the area’s median home price. These properties are generally your most highly sought after home making for safer and more liquid investment class.
For the second home investor these homes provide the cash flow and sustainability they seek. If you desire to occupy these homes from time to time throughout the year renting them in the vacation pool such as AirBNB or VRBO make for a great mix of vacation get away as well as safer investment for you.
Even if your desire is for a larger home in a different part of town, many have found that placing their stake in the ground at the location they want to live in allows them to ride the economic wave of prosperity for this particular market.
Happy Investing!
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The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal service or professional tax service. As with any investment, there is an inherent risk in investing in real estate.
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