Do you fall in love with your vacation spot, end up scanning real estate listings and wonder: what if we could buy a home here or rent a place there the same time next year?
While it’s fun to dream, it can be difficult to decide whether renting or buying a second home is the best option. The choice comes down to more than whether you want a permanent spot to keep your flip flops. For instance, if you visit the same spot every year, you may want to consider if it makes more financial sense to buy a home rather than help pay for someone else’s second mortgage. Are you approaching this decision as investor, hoping to generate cash or sell at a higher price down the road? Is it about convenience? If so, is it more important to have a set place to stay, or is it better to not have the hassle of upkeep and managing a property remotely?
Besides comfort and convenience, there are many financial implications to consider when buying versus renting a home.
Let’s take them separately. First, the advantages of renting:
- Flexibility - Renting a home is a no-strings-attached contract. If you don’t like the property, location or even the decor you can stay somewhere else the next time!
- No maintenance - Maintaining a second property can be a lot of work especially if you are not a short drive away and only get to be on site every couple of months. (See below for more about costs).
- No association fees - Can you say HOA? Depending on whether you buy a condo or townhome in a complex, you may have to contend with the Home Owners Association or HOA. HOA’s decide on everything from what type of lawn ornaments are allowed to additional monthly fees for the pool. Consider the fine print- does it include grounds keeping?
- No taxes - Property taxes cost a bundle; renting eliminates any need to pay extra taxes. Spend the money on souvenirs instead!
- No cleaning - This might be one of the best perks of all. When your vacation is over you can leave the keys and not worry about what might have been spilled on the carpet.
- No yard work - If there’s a lawn, you don’t have to mow it and same goes for shoveling in the winter! There’s also no stress when a storm hits and the house is damaged or the gutters break or pipes burst.
- Less financial commitment - you don’t need to worry about a second mortgage, rental income or homeowner’s insurance. Buying a home comes with a large down payment and you’ll need to set aside money for repairs.
- Less risk - If something breaks or needs to be replaced you can call the owner.
- Renting does come with its share of cons, too, like bad decor, worn furniture and money for repairs should something break during your stay.
Now, the advantages of buying:
- You own it - The house is yours! You can invite as many guests as you like or let your friends and relatives use the house when you’re not spending time there.
- It can be both a physical and mental retreat - owning a vacation home provides solace in that you can get away whenever you want (provided you can get the time off from work!).
- Financial asset - It can become a financial asset in the future as long as you are able to keep up with maintenance and payments. Knowing the average maintenance costs up front is a must. (Generally maintenance costs on a vacation home are about 1.5 to 2 percent of the assessed value.1 For example, maintenance costs on a $200,000 home will be between $3,000 and $4,000).
- Diversify your portfolio - Owning a second home can help diversify your investment portfolio and create a safety net. If this is your retirement strategy, it might be helpful to consult a financial advisor before purchasing a home. Rockland Trust can help.
- Extra income - A vacation home can generate additional rental income and boost your annual earnings.
- Real estate appreciates in value - Even if you don’t plan on selling your home, building up home equity can provide a solid line of credit. On average, real estate appreciates about 5 to 10 percent per year.2
- Retirement retreat - If you plan carefully, your vacation home may someday become the place you spend your retirement.
- Buying a home does come with risks especially if you are near water and will need insurance to protect yourself in case of flooding or other weather-related damage. And once you’ve bought, you are locked into vacationing at that location for as long as you plan to own the home.
We might not be able to help you decide between the beach or the mountains, but if you are thinking about renting or owning a vacation home, Rockland Trust can help you figure out what makes the most financial sense.
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1 https://www.washingtonpost.com/realestate/is-there-a-link-between-property-tax-rates-and-the-rate-at-which-your-home-appreciates-in-value/2018/04/17/1a56806a-418d-11e8-8569-26fda6b404c7_story.html?noredirect=on&utm_term=.c53c8e9c638e
2 https://www.realpropertymgt.com/rental-property-maintenance-myths/
