Historical context: This article was originally written in 2020. Its pandemic and 2021 market commentary is retained as historical context, not a current forecast. Financing and tax statements below have been corrected; evaluate current conditions before making an investment.
Are you thinking of buying a second home to rent out? Even if you aren’t, you should be; for now, it might be the perfect time to invest in a second rental property. With the COVID19 vaccine on the horizon, we can all hope for a brighter 2021 than we thought a few months ago. Here, we bring you tips on what to consider when making the purchase.
Look Into Vacation Rentals
Once the lockdown restrictions ease, the rental market will likely grow again, especially for vacation rentals. People are going to want to go out and have fun, so you may want to delve into the vacation rental market as that may prove incredibly lucrative for you in the near future.
Financing
Never ignore budget and financing when making an investment. Many people end up making spur of the moment decisions to grab the best deal on the market and end up making poor investment decisions that prove burdensome financially.
Financing and tax treatment depend on whether the property is a personal second home or an investment rental, how it is used and the loan terms. Down-payment requirements are not universally 30%. Mortgage interest attributable to rental use may be deductible, subject to applicable limits and allocation rules. See IRS Publication 527, Fannie Mae’s occupancy classifications.
Compare financing options with a licensed lender and review the tax treatment with a qualified tax professional before borrowing against either property. Borrowing against a primary residence exposes that home to repayment risk; it is not automatically the best financing choice.
Look Into the Management Aspect
You will not only be the owner of a second property; you will also be a landlord unless you are planning to use it for personal vacations only, which is a costly option. If you think managing one property is difficult, managing a second property is double the work, and managing a second property that is situated in another city or state is even more burdensome for the landlord.
Often people neglect the management aspect in their excitement of buying a second home to rent out and soon find themselves overwhelmed and struggling to manage both properties. Make sure you take into account management costs and workload into account before making a purchase. Ideally, you should contact a property management company to help you make decisions and take over the property’s management.
Calculate the Return on Investment
Never neglect the numbers. Not all properties are marketable, and not all will attract a steady flow of renters. Whether you purchase a vacation rental, a single-family home, or a multi-family residential complex, calculate the return on investment so you know how easily you will be able to pay off the property and how beneficial it will be for your investment portfolio.
Buying a second home to rent out sounds easier than it actually is. You will need experts to guide you through the process, so make sure you reach out to your property manager or investment advisor as they will be able to guide you around the rental market.
