Considering a second Home

You’re thinking of investing in a second home! If you’re a Floridian maybe you long for the cool mountains of the Carolinas. If you’re a northerner maybe it’s a condo on the beach in Florida.

The only thing you must remember about a second home is that there will come a time when you or your surviving family members are going to want to sell it. As with all real estate, location will be the biggest factor in the resale value of this investment.

Now what else do financial types think about with respect to second homes as investments. How about rent-ability? Maybe this property can be rented out during some season of the year that will offset the cost of owning and maintaining this property.

For example suppose you buy a condo on the beach in Myrtle Beach, South Carolina. You can rent it out most of the year. In the summer the warm waters of the Gulf Stream, which passes by, give you that lovely southern ocean water and there’s a lot more surf than you see off Miami Beach. In the winter that Gulf Stream keeps the temperatures a little higher than inland South Carolina so you can still play golf in January. There are lots of golf courses around Myrtle Beach.

You can probably rent that condo out for enough of the year that the rental income pays off the condo and you can keep a couple weeks open for your own use. You can also depreciate the furnishings and shelter some of that rental income.

Another consideration is financing the property. It’s not your primary residence so you don’t get the tax write-off that you get on home mortgage interest. So maybe what you do is refinance your home and take some equity out to purchase the second home. It would be great if you could buy the second home for cash by taking equity out of your primary residence. You’d get a big tax write-off on the home mortgage interest and have no monthly mortgage payments on the second home.

Are you going to manage this property from the standpoint of rentals and maintenance? If you do, any income from the property is not passive income it’s earned income. Earned income is taxed at your tax bracket rate. Passive income may be taxed at 39%.

That takes you back to the financing question above. If you are not going to manage the property but leave it to a local managing agent then you might need some interest expense offset to income to avoid passive income.

Then there’s the aspect of insurance to be considered. Now you are not just talking homeowners insurance but insurance of a property that others will be using a great deal of the time. Liability insurance becomes a big consideration when a bunch of strangers are going to be using your property. Maybe it’s time to look into an umbrella policy for personal liability. Maybe title to this property should be carried in a corporate entity so that you are not the title holder but just the owner of the stock of the corporation. It’s probably time to talk to your lawyer and your insurance agent.

As with all investments there are considerations that need to be taken into account. For most of us a second home is not a place we can afford to keep exclusively for our own use. Few of us are wealthy enough to have multiple residences but second or third or even more property investments are possible if we look at them as investments not amusements. They certainly make more sense than other things we might do like buying a boat which is just a hole in the ocean that you have to keep filling up with money!