The economic ramifications of owning a vacation home

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01 October 2021

4 minutes to read

Source / Disclosures

Disclosures: Bhatia and Mandell do not report any relevant financial disclosures.


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Work hard, play hard. Doctors, young and old, take advantage of free time and vacations.

Sanjeev Bhatia

Sanjeev Bhatia

David B. Mandell

David B. Mandell

Whether it’s a ski house, a beach house, or just a quiet getaway with a view, wouldn’t it be nice if saving a vacation with family and friends also had a financial benefit? As hard as it sounds to believe, owning a second home, when done strategically, can deliver a financial benefit to your bottom line, while also providing a tremendous vacation asset for you and your family. The vacation home could become a retirement home for surgeons in their later years. In this column, we take a look at the pros and cons of owning a second home and offer strategies for physicians, including millennials, to consider for the optimal financial benefit of a vacation asset.

Advantages

Leveraged appreciation . There are both financial advantages and disadvantages to owning a vacation home. Like all real estate, second homes, whether condos or independent properties, allow you to benefit from a leveraged capital gain through mortgage financing. Typically, a 20% down payment cash investment, which is common for second home purchases, allows you to accumulate any additional equity that your property gains in appreciation. On the other hand, however, leverage depreciation also occurs if your second home is losing value.

Tax deduction . Owning a second home also offers the possibility of receiving rental income while having the possibility of amortizing certain expenses. If you rent the house for more than 14 days per year, your property is considered a business for tax purposes and you must report the rental income on your tax return. If you personally use the holiday home for more than 14 days or more than 10% of the number of rental days, you can deduct rental costs up to the amount of income but cannot deduct losses. These expenses include accommodation costs, cleaning costs, repairs, property taxes, mortgage interest, property management fees and more. If your personal use is limited to 14 days or 10% of the rental time of the unit, the expenses are deductible and the rental property could even create a passive loss.

Your own getaway place . One of the main benefits of owning vacation property is the ability to use it as often and for as long as you want. Buying a vacation home in an area that you or your family frequent allows you to avoid paying expensive accommodation costs on repeated trips. Such flexibility also allows you to potentially use your second home as a future retirement property if you are nearing the end of your career.

Disadvantages

Property management . Unlike financial securities, a real estate asset requires ongoing management and maintenance. A vacation home is probably one of the most practical investments you can make due to the year-round weather commitment. Professional property management services are helpful in easing the burden of turnaround tasks, repairs, maintenance, and other issues, but they often come at a high cost. Short-term property management services often charge 15-40% of all rental income. Some properties, like condos, require less time and property management can be integrated through the condominium association. However, this too often comes at a high cost.

Must market property to get traffic . Getting tenants to come to your property, especially the right kind of vacationers who will take care of your prized possession, is no easy task. A good marketing strategy would include listing your home on all of the top vacation home rental platforms, optimizing your listing with compelling photos, pricing to attract your target audience, and most importantly, staying on top of trends. prices in the vacation zone so that you stay competitive.

Lenders will charge more for financing . It’s no secret that lenders often charge a higher interest rate and frequently offer a lower loan-to-value ratio than those buying vacation homes than first-time home buyers. Therefore, expect to pay a premium on your mortgage rate and be prepared to put up to 25% down payment on your property.

Location, location, location

Understanding the pros and cons of investing in vacation assets is paramount to any sound decision making. If you choose a property in a location that you and your family will use multiple times throughout the year, it is more likely to justify the time commitment required to cultivate your second home. Location is also essential in determining the appreciation potential of your property. If your target location has natural barriers or zoning restrictions that limit residential real estate development, your property is more likely to appreciate if the area remains popular with tourists.

The principles of Buffet acquisition cost

Make sure you make sure the price you are buying the property for is financially sound with your pro forma models, including all maintenance, taxes, and financing costs. As Warren Buffet said, “It is far better to buy a wonderful business at a fair price than a fair business at a bargain price. The best vacation rental properties, like businesses, are often very expensive, but can be a better investment than a cheap property in an unwanted destination.

Conclusion

Although they are on a completely different path, physicians can benefit significantly from a real estate investment, especially in geographic areas that they may attend with their families. Make sure you do plenty of homework, modeling the financial aspects of owning a second home to see if it makes sense for your situation.

The references:

The pros and cons of investing in a vacation rental. www.millionacres.com/real-estate-investing/rental-properties/pros-and-cons-investing-vacation-rental-properties/.

Wealth planning for the modern doctor and wealth management made easy are available for free in print or electronic download by texting OT21 at 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.

For more information:

Sanjeev Bhatia, MD, is a sports medicine orthopedic surgeon at Northwestern Medicine in Warrenville, Illinois. He can be contacted by email: [email protected]

David B. Mandell, JD, MBA, is a lawyer and founder of the wealth management company OJM Group. You should seek professional tax and legal advice before implementing any strategy discussed here. He can be reached at [email protected] or 877-656-4362.


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