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Should You Buy or Rent Your Second Home Should You Buy or Rent Your Second Home
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Should You Buy or Rent Your Second Home?

Insights & Ideas Team •  October 28, 2015 | Enjoying Retirement

Linda and David Daniels enjoy living along Upper Nemahbin Lake in Oconomowoc, Wisconsin. But winters can be tough, especially when temperatures dip below zero. So when the couple decided it was time to find a second home, they bought a condominium in Fort Myers Beach, Florida—a town they knew well after three decades of camping and renting properties in the area.

“We have the best of both worlds,” said Linda, a retired schoolteacher and snowbird who is looking forward to alternating between their lakeside and oceanside homes.

The Danielses are among the growing number of Baby Boomers who are buying a second home. Vacation home sales catapulted to an estimated 1.13 million in 2014, representing a 57.4 percent increase from the previous year, according to a 2015 survey of residential homebuyers by the National Association of Realtors (NAR). One-third of buyers plan to use their property for vacations and family retreats, while 19 percent plan to convert their vacation home into their primary residence in the future.

Could a second home be in your future? Renting a property may be the best option for some people, while others may prefer to purchase a second home. Here’s a look at the pros and cons.

Renting Pros:

  • You have the flexibility and time to become familiar with an area before committing to ownership there.
  • There are no ongoing operating expenses, such as property insurance, property taxes, homeowner association fees or maintenance and repair costs.
  • Because there’s no year-round commitment, there aren’t any monthly mortgage payments funding a vacation home when you aren’t using it.
  • You have the flexibility to explore different travel locations because you aren’t committed to one property or destination.
  • You may be able to maximize your vacation budget by renting in locations in which you couldn’t afford to buy. With a rental, you can splurge on amenities—pools, patios, saunas and more—that you couldn’t afford as a property owner.

Renting Cons:

  • There are no guarantees your favorite property will be available every year, whether because of scheduling conflicts, renovations or change in ownership.
  • You aren’t building equity with another property no matter how much time you spend there. The money you’re spending on rent could be going toward making the property your own or generating rental income to offset your expenses.
  • It could take more time to plan your vacations because you need to seek accommodations each year.  
  • You have no control over price fluctuations. Rent can change from year to year and season to season, especially if there’s new ownership, which can make it tougher to stay within your family’s vacation budget.
  • No matter how much you enjoy your favorite vacation rental, it’s still not yours. You can’t add those personal touches that make a place special.

Ownership Pros:

  • You and your family have the flexibility to use the property whenever you please because you’re not bound by someone else’s rental schedule.
  • With ownership comes the freedom to make the property your own, whether it’s adding decorative pillows in your favorite color or planning a future renovation project to expand the patio.
  • It can be an investment opportunity in terms of monthly rental income and price appreciation. You may want to speak with an accountant about tax rules for vacation home rental income and expenses, which vary according to how often you rent out the property and whether you sometimes use it as a personal residence.
  • A second home can provide the perfect setting for getaways with family and friends throughout the years. When the time comes, you can pass down the second home for future generations to enjoy.

Ownership Cons:

  • You may need to take out a mortgage to finance a second home. Consider speaking with a financial professional to determine if you have enough money to maintain a primary residence and second home. According to NAR, 30 percent of vacation homebuyers paid in cash in 2014, and of those who took out a mortgage, nearly half financed less than 70 percent of the purchase price.
  • You’re responsible for ongoing operating expenses, such as property insurance, homeowners association fees and maintenance costs. Homeowners insurance typically covers damage from fire, theft and vandalism. Second homes near beaches and mountainsides may require special coverage for specific risks such as hurricanes, wind, floods and sinkholes.
  • If you plan to offset expenses by renting the property, you may need to pay a professional property manager to maintain the property or help with renters while you’re away.
  • Additional funds are needed to pay taxes, including property, income and estate taxes, which can vary substantially depending on the location of the property.

Deciding whether to rent or buy a second home can be exciting, especially if it comes after years of hard work. Let your personal preferences guide you, but be realistic about the financial responsibilities involved. A financial professional can help you evaluate all the factors and determine if a second home fits into your long-term plans.

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