Some people return to the same vacation spots year after year. And eventually, it just makes sense to buy a vacation home. Not only do they avoid the hassle of booking hotels, but they also get to share this vacation rental property with friends and family, building lifelong memories. Let’s take a look at second home vs. investment property.
Meanwhile, other people appreciate vacation rental properties as a passive income source. While they might stay in the vacation rental property once or twice a year, they rent it out for income to others most of the time. To them, this vacation property is a cornerstone of their investment portfolio, what we’d call an investment property.
If you clicked on this article, you probably find both of these viewpoints compelling. You want to enjoy your vacation rental property and share it with loved ones. Still, you understand the earning potential of a vacation rental.
Take a look below at a few points you should consider before deciding if a second home or an investment property is right for you.
Vacation Rental Regulations
If you plan to rent out your vacation property to others, you’ll need to keep a close eye on state and city regulations. Do your research to make sure you have all the necessary licenses and completed any registration processes.
It’s also a good idea to keep an eye on local news and track upcoming elections. That way, you’ll have a good sense of where the city and state governments stand on vacation rentals. Down the road, they may make it harder or easier to operate your rental.
It’s also a good idea for a vacation or second homeowner to keep an eye on local news. You’ll have a better idea of when a property tax hike is in the works and be able to plan accordingly.
Wear and Tear in a second home vs. investment property
As a vacation rental owner, you should expect some natural wear and tear to your vacation rental property. Over the months, light bulbs will burn out, and remote control batteries will die. Further down the line, you’ll need to replace appliances, furniture, and soft goods (such as bedding).
However, as Mashvisor writer Elias Rizek points out, wear and tear is not the same thing as damage caused by a tenant. If the tenant purposely or accidentally harms your property or its appliances, then it will be their responsibility to pay. Make sure you have a plan in place to bill guests for any damages.
Even with a regular vacation home, you’ll still have to deal with wear and tear. Paint will eventually chip, and the roof will need repair at some point, even if you only stay at the property a few times each year. Set aside a budget annually for these maintenance costs.
Income Expectations for a second home or investment property
Before investing in a second home or a vacation rental property, it’s good to have a realistic expectation of how much you’ll earn from the property. Even if you want this property to serve primarily as your vacation home, you may still want to rent it out from time to time to offset some of the costs.
Tools like AirDNA and AllTheRooms will give you an idea of how much comparable rentals nearby earn per night. They’ll also clue you into what the high and low seasons look like for your area and give you a snapshot of long-term vacation rental trends.
second home or investment property as part of Investment Portfolio
Whether you’re enjoying this property as a vacation home or treating it as a full-time vacation rental, it is still an asset that you’re investing time and money into. Consider how this asset fits into your larger investment portfolio.
To protect your wealth long-term, it’s important to diversify your investments. Is your primary residence also your only asset? Then neither a vacation home nor an investment property is a good idea right now. Aim to match your real estate holdings with comparable investments in stocks and bonds before adding another property into the mix. Check out this article from the Financial Samurai to get an idea of how to diversify your investments over time.
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