There are two main reasons why people purchase a second home. The way a second home is financed often depends on how it is classified. Second homes can either be vacation homes or rental properties. Up until recently, these homes were generally lumped together in the real estate market as “second homes.” However, with more people investing in real estate, many experts are suggesting that the category of second homes be divided into two distinct groups.
Types of Second Homes
Rental Properties
Rental properties are second homes purchased with the goal of making a profit. These properties can either be long-term investments or short-term, flip-style purchases. They range from houses to condos, and everything in between.
Long-term investment rental properties are homes bought with the intention of selling them later when the market has significantly increased their value. These types of properties became especially popular during the housing boom of the mid-2000s when home values skyrocketed. However, such markets are rare, and people looking to sell homes for profit must often be prepared to hold onto the property for an extended period. During this time, the property can be rented or leased to interested parties. The rent should, at the very least, cover the mortgage and property taxes. In many cases, long-term investors find that their profits increase over time as the value of the property rises. Similarly, as with selling prices, the amount a homeowner can charge for rent will go up, allowing them to eventually charge more than the mortgage payment.
On the other hand, homes bought to flip quickly are a different matter. Often, owners of these properties finance their purchase with a second mortgage. The goal is to sell the property quickly, often before the first mortgage payment is due. Remember, the initial payments on any mortgage are where the bank earns the most interest!
Vacation and Retirement Homes
Vacation and retirement homes have gained significant popularity in recent years. With more disposable income, many families are choosing to invest in property they can move to when they retire. As real estate is being snapped up all over, savvy vacationers are increasingly interested in purchasing property in prime vacation spots where they can enjoy yearly holidays.
As with income properties, owners of vacation and retirement homes also have the option of renting out their properties to help finance their second home. One option is to charge a standard rent, where the owner collects a monthly fee for allowing someone to live in the house. Again, the rent should be set slightly higher than the mortgage payment, as the owner will need to cover property taxes, other fees, and any necessary repairs that may arise if the tenant proves to be problematic. Since the goal of a vacation or retirement home is not necessarily to make a profit, but simply to pay off the mortgage, there is less pressure to charge excessively above the mortgage amount.
Owners of vacation homes may find it inconvenient to rent to a monthly tenant, as this could interfere with their own vacation plans. However, there are exceptions, such as vacation homes that are primarily seasonal. Properties like condos on ski hills or in resort areas can be rented out to workers during the off-season and still remain available for personal vacations. Second-home owners might also consider building a separate suite on their property to rent out. There is always demand for rental properties, particularly in resort areas, and an add-on can be a great investment year-round.
Financing Vacation Homes Year-Round
Another way for vacation home owners to finance their properties year-round is to rent them out on a weekly basis to other vacationers. Many people purchase vacation properties in highly popular areas where hotel prices are often prohibitively expensive. More and more families are realizing that renting a private condo or house can be a cheaper and more comfortable alternative to staying in hotels. These rentals come with all the comforts of home, offering a much more relaxing experience for vacationers. Families can rent your vacation home for blocks of two or three weeks, or even longer. This allows owners to plan their own vacation while also making mortgage payments through rental income.
Renting out vacation homes has become so popular that many resort areas now have entire industries built around renting out properties. Vacation home rental companies handle bookings, cleaning, and providing supplies for the property owner, though these services come at a cost. Many homeowners find that the cost is well worth it, as the company takes care of nearly all concerns related to managing the property.
For those purchasing second homes, it’s important to note that the investment itself plays a key role in determining how successful the financing will be. Don’t purchase a vacation home in an isolated area and expect to finance it purely through rentals. Renting is generally only viable in or near busy resort areas. An isolated second home may require more work to advertise it as a rental, or you may need to rely on your own income to cover mortgage payments.
