One of the ways people all over the world like to have fun is owning a second home. This week our reader sees a second home as a rental property. Not understanding the usage of the property is an entirely different mindset spells disaster for the owner. I hope they don't jump in until they read the message. [Richard Montgomery]

Reader Question:

What are the pros and cons of owning a second home? My wife and I have the opportunity to purchase a second home. I've spoken with the homeowner, who is a friend of mine. He stated that he would like to get about $200,000 out of the sale. We are thinking of renting out the house, possibly for a couple of years. The intention that one or both of our daughters upon graduating college will find gainful employment. At which time they could take over the house, and the payments. 

 

Monty's Answer:

A second home and a rental property are different. For example, not everyone can or should own rental property. Being a landlord is a risky business fraught with opportunities to lose money. Here is an article to provide you with information about owning rental property you may find valuable. There is no indication that you plan to use the property as a second home. It sounds like the goal is to buy it and rent it out for two years and sell it to your daughters. Two young people still in school suggests that a lot can change in two years. What if your daughters don't want to live there? Or don't want to own a house? What if they relocate to another state or another part of the country with their job? What if a tenant stiffs you for 6 months' rent? Some tenants prey on uneducated landlords.

When investing in real estate, ownership has to work out on pencil and paper and be scrutinized by a certified public accountant (CPA) with landlord clients. There are many variables in real estate, and specifically, with your stated goal, it may be challenging to reach a quality conclusion.

 

Pros and cons of owning a second home

Pros:

• Availability: When the mood hits, you can do it last minute. No need for reservations.
• Travel light: You have everything you need there, including a lawnmower.
• Lend it to friends and family: A long weekend or longer is one of the more memorable gifts.
• An excellent family destination: Keep in touch with your children and grandchildren.
• Appreciation: This is not a given. More likely, if you buy it right, care for it, and own it long enough.
• A change of scenery: When you have vacation time, different weather, or need a break.
• Interest on the second home loan is deductible: There are qualifications so get tax advice.
• A capital gain exclusion: If you have a gain - but not structured like the sale of a primary residence.

Cons:

• Added responsibility to maintain, insure, repair.
• Higher turnover rates in second home communities which suggests ownership gets stale.
• Many second homeowners lose the ability to vacation elsewhere as it ties you one location.
• The financial resource commitment diverts capital for other uses. 
• The time invested in maintaining, insuring, repair and travel divert from other activities.

 

Proceed with caution.

 

Richard Montgomery is the author of “House Money - An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Find him at DearMonty.com.

 

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