Second Homes: Buy or Rent?

Many assume a second home means purchasing a house, condominium, or mobile/manufactured home. However, there are those who have long-term rentals that they call their second home. 

Can a Rental Be a Second Home?

Can you realistically consider a rental to be a second home? The answer is "yes!" Just as primary residence renter (e.g., houses or apartments) consider their abodes to be home, there is also the option of renting your second home.

When does a rental become a second home versus a vacation or other temporary arrangement? Here are some suggested parameters:

  1. What is the rental duration?

    The longer the rental duration, the more likely you could consider the property to be a second home. For most people, a longer-term rental of 3 to 12 months could qualify as a second home.

  2. Do you consistently return to the same property?

    If you return to the same long-term rental year after year, it's a lot easier to confer second home status on the property.

Take the hypothetical example of a Michigan couple who rent the same Florida apartment every year from the first week of November through the second week in May. They drive each way bringing clothes and personal belongings for the stay. They also rent a small storage unit in Florida near the condo to store items they prefer not to haul back and forth, such as bicycles and beach chairs. Because they live in Florida for just over half the year, they no longer pay Michigan state income tax.

Given this scenario, it's easy to see how this couple considers their Florida apartment to be a second home.

Buying Versus Renting

The decision to buy or rent a second home involves most of the same factors as the same decision for a main home. At a high level, the decision depends on the current housing market along with your unique financial situation and personal preferences.

Buying

Advantages of Buying 

First, let's look at the advantages of buying.

  • Ownership Means Equity

    Buying means you own an asset that can go up or down in value. In the past few decades, U.S. real estate values have risen on average in most markets. As a result, buyers can have some degree of confidence their second home value will appreciate over time.

  • Earning Rental Income

    With full ownership, an owner has the option of generating revenue from renting the property. This may be an option for some forms of partial ownership also.

  • Tax Advantage

    The federal income mortgage interest tax exemption applies to the sum of main and second home interest payments. However, interest on other homes is not eligible.

  • Freedom

    Owners have the freedom to live in the property whenever they want, to store their belongings at the home and decorate the indoor and outdoor spaces of the structure to their liking. If applicable, however, Homeowner Association rules may restrict certain practices.

Disadvantages of Buying 

Next, what are the disadvantages of buying?

  • Value Appreciation is Not Guaranteed

    Risk always accompanies the purchase of an asset. One risk is that the property may not appreciate as much as planned. It may even lose value in certain situations. Homeowners in coastal Florida may be faced with such a prospect.

  • Landlord Headaches

    Renting a property can be a lot of work and expense.  

  • Costs of Ownership

    Owning a second home means a long list of expenses. Subscribe to the Cantissimo Senior Living blog to be notified of our upcoming post detailing costs of owning a second home!

  • Always the Same Place

    Owners may be reluctant to travel elsewhere since they've put so much time and money into the second home.

Renting

Advantages of Renting

What about the renting option? Here are some of the advantages.

  • Avoid Ownership Risks and Costs

    A renter offloads ownership risk to the landlord. Responsibility for property maintenance, structural insurance, and other costs belongs to the rental property owner. Also, renters avoid purchasing/selling costs. Finally, renters pay only for the time spent staying in the property, whereas owners pay expenses year-round even when the home is empty.

  • Flexibility

    Renters don't have to worry about selling an asset when they no longer want to stay in the property. Also, a renter can rent different properties in different locations each year. This might be a good way to scout future retirement locations.

Disadvantages of Renting

Renting has disadvantages as well.

  • No Asset – No Equity

    Renters forgo the possible investment gains on a second home.

  • No Income Opportunity

    Renters pay rent. They don't earn it.

  • No Tax Advantage

    Tax breaks for owners are unavailable to renters.

  • At the Landlord's Mercy

    While the landlord is responsible for many things, renters often experience delays in getting problems fixed in the property.

Rental Costs

While rent is the major cost, renters face many other possible expenses. Here are a few:

  • Security Deposit

    This cost ties up cash until you move. Some landlords may keep all or part of the deposit for very picky reasons.
  • Pet Deposit/Fees

    If allowed, having a pet may incur additional fees.
  • Renter's Insurance

    Your stuff is not covered by the landlord's insurance, so getting separate insurance makes sense.
  • Utilities

    Rental agreements differ in terms of what utilities are included. You may have to pay some separately.

How to Decide?

The decision to buy or rent is informed by both personal and economic factors.

The personal factors include answers to questions, including

  • Do I want the freedom to stay in the property anytime I choose?
  • Do I want the freedom to change the property to meet my desires?
  • Do I want to restrict myself to one location for a getaway destination?
  • Do I want to be at the mercy of a landlord?
  • Do I want to be responsible for maintenance of the property?
  • Do I want to take on landlord responsibilities if rental income is of interest?

 Economic factors include answers to questions including:

  • Do I want to have an asset that will hopefully increase in value?
  • Do I have the financial resources to acquire and maintain the property?
  • Does buying make more sense financially, or does renting?

 To get a clearer picture of this last question, set up an economic comparison between buying and renting. For the prospective purchase, find the following data:

  • Purchase price
  • Down payment
  • Mortgage amount and interest rate
  • Mortgage Payment (P&I)
  • Property Taxes
  • Insurance
  • Maintenance, Repairs, etc.

 For the rental part of the scenario, find this data:

  • Monthly rental amount
  • Non-refundable front-end fees
  • Other monthly fees

 Also, assume that the amount you would have otherwise devoted to a down payment (your equity going into a purchase) is invested at an interest rate of your choosing.

Using hypothetical numbers, the analysis plays out as follows:

Purchase

Purchase price

$400,000

Down payment

$150,000

Mortgage amount

$250,000

Mortgage interest rate*

5.5%

Mortgage Payments (12 months)

$28,452

Interest paid Year 1

$12,375

Tax Benefit of Interest Deduction (35%)

$(4,331)

Property Taxes

$11,000

Insurance

$2,000

Maintenance, Repairs, etc.

$9,600

Annual Cost to Own

$30,644

Annual Price Appreciation (4%)

($16,000)

Net Cost to Own

$14,644

* 15-year mortgage

Rental

Annual Rent ($2,500/month) plus other monthly fees.

$31,500

Invest $150K at 10%

($15,000)

Net Rental Cost

$16,500

 

In this case, the net cost of buying is less than renting. Note, however, that changing any of the input assumptions could alter the outcome of the analysis. Also, since each person is different, the $1,856 difference in this example may not matter to some. They may rent anyway because their personal factors outweigh the difference in dollars. 

Want more? Download our eBook, Your Second Home: Making the Dream a Reality!

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