7 Benefits to Owning a Second Home

    7 Benefits to Owning a Second Home

    Oct 05, 2020

    Second homes were once reserved for the wealthy. Today this is no longer the case. Many second home owners here in Summit County, Colorado and across the country have made their dream of owning a vacation home a reality through subsidizing the cost of their second home by renting it short term when not planning to personally use it while others have afforded to purchase a part ownership of a property in an area they enjoy visiting. With air travel on hold for many families, some are channeling their vacation budgets into vacation homes that can be utilized throughout the year.

    

    Second homes have the potential to offer many benefits for those lucky enough to be able to afford this type of investment. 

    1.Income Potential

    Is your potential second home located in an area where people like to vacation? If so you may be able to use your home to generate additional income through renting it short term when you don’t plan on using it yourself. 

    Your short-term rental income may be able to subsidize your second home’s monthly mortgage payments, HOA dues, or pay for updates and repairs. If you are able to rent your second home on a more consistent basis you may even be able to show an annual profit! If this is something that interests you I highly suggest you contact several areal property management companies to enquire about short term rental projections for the size of home you are looking to purchase prior to doing so. 

    2. Long Term Profits

    Louis Glickman once said “The best investment on earth is earth”. 

    According to the Federal Housing Association, Colorado ranks second for home appreciation since 1991, only behind Washington DC, with a total appreciation of 380.24% between Q1 1991 and Q3 2019. Over the latest 5 year period (Q3 2015 to Q3 2019) Colorado ranked 4th with a total 5 year home appreciation of 55.87%.

    The value of real estate climbed steadily from 1963 to 2007 across the US. Due to excessive risk taking by banks and a handful of other factors 2008 lead to the market crashing and the US housing bubble taking a fall along with it. By 2013 average home prices across the US rebounded to pre-crisis levels. 

    Whether you decide to be the exclusive user of your second home or rent it on a short or long term basis in order to fully or partially subsidize the cost of owning a second home real estate is thought to be a “safe” investment due to homes appreciating in value in the long run.

    3. Tax Advantages

    Using your second home rather than renting it allows you to deduct your interest on your mortgage to the same levels as you are able to do with your primary residence. 

    You can also deduct your property taxes on your second home. Certain rules and limits apply and changes to these rules and limits do occur. 

    If you chose to rent your second home you qualify for certain tax deductions. If you rent your second home out for 14 or fewer days during the year, you can take the rental income tax-free. If you are renting your second home for more than 14 days in a calendar year you must report all rental income and if this is the case you get to deduct rental expenses. This requires great record keeping because you need to calculate costs between the time the property is used for personal purposes, and the time it is rented.

    Making your second home your primary residence for two or more years prior to you deciding to sell then it also qualifies for the $500,000 of tax free profits (or $250,000 if single) for which sales of primary residences qualify.

    4. More Quality Family Time

    Many financial professionals believe that a second home is first about lifestyle and second about investment. It’s important to take into consideration what is sparking your interest in owning a second home. 

    Do you find yourself wanting to spend more quality time with your children and especially during their teenage years when most teen’s lives become less about family and more about time with their friends? Do you see yourself spending time with your future extended family and grandchildren? Do you see yourself wanting to retire in your second home or possibly wanting to pass your second home onto your adult children to enjoy when you are finished using it yourself? If you said yes to any of my questions above purchasing a second home could possibly bring you the quality family time you are seeking for many years to come!

    5. Home Exchange

    The concept of home exchanging has been around for a long time and is an economical and fascinating way to vacation far from home. Many second homes are also vacation homes, therefore they are located in desirable locations on the beach, in the mountains, or on a lake making it an appealing property to swap with other property owners for their homes throughout the world.

    With less clutter and personal items it’s much easier to depersonalize and prep your second home for a home swap than your primary residence. 

    6. Diversify Your Investments

    Diversification is the practice of spreading your investments around so your exposure to any one type of investment is limited. If your 401K will not be to the level you desire to maintain the lifestyle you desire through your retirement years, real estate may just be the next way for you to diversify your portfolio. 

    Real estate trends show an increase in value steadily over time. It’s never safe to plan on a large increase in value on real estate investments in a short period of time, but depending on the local economy and market where you plan to make your purchase this could happen. 

    Do your research. Speak with a financial advisor and area Realtor® who is knowledgeable on the area market where you plan to make your purchase. 

    7. Purchase Your Retirement Home - Before Your Retire

    Is there an area where you like to vacation? Is this a place where you would like to retire? With home loan interest rates at an all time low now might be a better time than ever to purchase your future retirement home. 

    Mortgages on second homes tend to require 20% down and come with higher interest rates than those on your primary residence, however it’s easier to qualify for a mortgage while you are still employed. Not to mention locking in a mortgage at a lower interest rate could positively impact your overall retirement budget. 

    Not planning on using your retirement home until you retire? Then maybe your second home purchase would make a good long or short term rental, paying for the home’s mortgage, insurance, taxes, repairs, etc with the rent you collect 

    Bonus Benefit for Some:

    Do you live in Colorado’s Front Range or another area in the country where traffic to and from your favorite weekend vacation spot tends to be a total  drag? A second home located closer to one of Colorado’s 32 ski areas may be the ticket to solving your traffic woes especially now with so many employers open to employees working remotely and schools now offering online learning options.

    Second homes can lead to many lasting memories of great times spent together as a family and potentially bring along other financial benefits as well. If you are starting on the path to making your dream of owning a second home a reality please take your time to do your research and find a knowledgeable qualified Realtor® to work with on your journey to owning a second home. 

    Check out my latest blogs for even more tips and tricks when it comes to Real Estate!

    10 Tips to Get More Home for Your Money

    Taking Advantage of Home Equity

    Home Remodeling - Is it Worth it?

    An Economic Slowdown Does Not Equal a Recession

    Disclosure

    The potential financial benefits of second home ownership listed above are my opinion and the opinion of others whom I’ve linked in my sources below. I am not an attorney, financial advisor, mortgage broker, or tax professional. I am a Realtor® who has a passion for helping buyers and sellers achieve their real estate goals in order to live their best mountain life. I urge you to seek legal advice and consult  a financial professional regarding the potential financial (and other) benefits second home ownership could bring to you and your family before making your purchase.

    Sources:

    The Press-Enterprise

    https://www.pe.com/2018/11/17/5-tips-on-when-should-you-buy-a-retirement-house-hint-before-you-quit-work/  

    CNN Money

    https://money.cnn.com/2017/03/28/retirement/millennial-retirement-real-estate/index.html

    USA Today

    https://www.usatoday.com/story/travel/advice/2013/01/30/10-things-you-need-to-know-about-home-swapping/1877345/

    Turbo Tax

    https://turbotax.intuit.com/tax-tips/home-ownership/buying-a-second-home-tax-tips-for-homeowners/L5Mzc5URo

    Federal Housing Association

    https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/HPI_2019Q2.pdf

    Investopedia

    https://www.investopedia.com/articles/mortages-real-estate/11/the-truth-about-the-real-estate-market.asp