Wouldn’t it be nice to have a second home? A little casita in Santa Fe or a small apartment in Manhattan? A cottage on the lake? You’d have a place of your own in a favorite destination, and you could rent it to short-term guests when you weren’t using it.
We actually did that when our grandkids were small and living in San Francisco. With the proceeds from a small inheritance, we bought a small condo nearby. When we weren’t using our second home, we rented it to short-term guests. Perfect.
OK, maybe not perfect. Our daughter’s family now lives in Berkeley and we travel outside our home area, so we hardly ever use the condo ourselves. Most of the time, we use it as a short-term rental. It takes a lot of work, and the reality is that we’re just about breaking even.
So we’re thinking about selling.
San Francisco housing prices have been going through the roof, so we’ll probably make a small profit – not much when we consider all the time and money we’ve put into the condo over the years. But we’re the lucky ones. Many people who buy a second home for short-term rental end up with big headaches and see little if any return – and many end up losing money. Those who are successful do a lot of planning and put in a lot time to make it work.
Here are some things to think about before you take the leap.
1. Decide on your goals
Why do you want a second home? To have a home of your own in a place you love or near your loved ones? To make a profitable investment? To increase your monthly cash flow? Being clear about what you want to achieve helps you make key decisions as you embark on the process of buying and setting up your second home.
2. Choose the right location
If you want your second home to pay for itself and bring in extra cash, think carefully about where to buy. You might love vacationing in an isolated rural area at the end of a winding dirt road, but you’ll have a that location will severely limit your pool of potential guests, as well as the rent you can charge. You might not mind having a busy highway between your home and the beach, but your short-term rental will be competing with more desirable beach-front properties.
Consider not only how attractive the location is now but how popular it’s likely to be in the future. Today’s hidden gems might be overwhelmed by growth, making them less special in the years to come. In the same way, today’s somewhat gritty neighborhoods in popular cities might well become lively, desirable urban destinations.
Also think about how far the home is from where you live. If it’s close by, you can do a lot of the work of managing the rental yourself. Otherwise, you will incur costs for someone to oversee the place, make sure guests can get in, handle problems, and so on.
Choose the right property
Together with location, the type of home affects how attractive your short-term rental is to guests, as well as how much rent you can charge. A 6th floor walkup apartment isn’t right for everyone. A “rustic” cottage might be too rustic for many people.
There’s another consideration: A very large home might not be the best second home for short-term rental. It will be more costly to purchase and maintain, which means you’ll have to charge more. Large homes also attract large groups, increasing the wear and tear and chance of damage, not to mention possible problems with neighbors.
Make sure you’ll be allowed to rent it out
Before signing a purchase contract, make sure you will be allowed to rent out your second home when you’re not using it. Many HOAs, condo buildings and coops have strict rules that limit or prohibit short-term rentals.
Make sure you’re ready for all the work
Homes don’t maintain themselves. Short-term guests don’t appear like magic. Plan on devoting at least several hours a week to the business of advertising and managing your short-term rental. If you’re always strapped for time, this might not be the best project for you.
How good are you with the unexpected?
Things happen: appliances break down, guests have to cancel or leave early, a guest accidentally crashes into a neighbor’s car. As a short-term rental host, you have to be ready to take care of unexpected problems without delay, no matter where you are in the world or what other priorities you have.
Consider ALL the costs
The purchase costs are only the starting place. Be sure to consider all the money you will have to spend to buy, set up, maintain, and advertise your second home, including:
- Mortgage payments. Keep in mind that lenders may charge higher interest rates for property that is being rented out.
- Property insurance. A standard homeowner’s policy might exclude homes used as short-term rentals, and a commercial policy might be more expensive.
- Taxes and fees. In addition to property taxes, you’ll pay federal, state, and possibly, local tax on the rental income. There might be HOA fees. You may also need to buy licenses or pay fees required by your city or town.
- Furnishings. Unless you buy a home that’s fully furnished, you’ll need to buy furniture, linens, kitchenware, appliances, carpets, electronics, and more – everything you and your short-term guests are likely to need.
- Maintenance and repairs. Your budget needs to cover ongoing maintenance, gardening, cleaning, replacing items such as stained towels and worn linens, and the other costs of keeping the home in good shape, as well as repairs when the roof starts to leak or the water heater goes out.
- Advertising and marketing. There are costs involved in reaching potential short-term guests, such as subscription fees or commissions paid to listing sites.
- Management. Unless you’re nearby to take care of arrivals, departures, cleanings, and problems, you’ll need to pay a caretaker or manager.
Make sure you have a cushion for the “what-ifs”
It’s never a good idea to stretch your finances to buy a second home with the thought that it will pay for itself. Chances are it won’t, at least not at first. Even in the right location with a lively short-term rental market, you can’t count on a steady stream of guests. And there will be times your home won’t be available for rental because you’ll be using it yourself.
Think about the what-ifs: What if a low snow year causes vacancies in your ski cabin? A hurricane destroys the beach in front of your beach house? Construction in your building or next door drives guests away? A recession or spike in gas prices make people hesitate to travel? A broken water pipe or other damage makes the home uninhabitable for weeks or months?
Make sure your budget can withstand the expected and unforeseen costs of owning a second home. The last thing you want is to find yourself financially strapped because of a second home that’s become a bottomless money pit.
Don’t count on making a profit
As we discovered ourselves, second home buyers often find that the rental income barely covers costs – if at all. They also assume they’ll get a return on their investment when they sell.
As with any investment, however, timing is everything. If you sell in a hot market, great. But what if the market is slow, and prices in your area haven’t budged – or have even dropped? Can you afford to lose the money you invested to buy, set up, and maintain the home?
The bottom line: buy a home you can enjoy
Instead of considering a second home as a source of easy cash, think of it as an investment in your happiness. Choose a home you’d love to spend time in. If it brings in extra income, great. If not, it can still be a place where you can go to unwind and, perhaps, even a home for your retirement.
For helpful articles on this topic, see Investopedia’s “Buying a Second Home to Rent: Dos and Don’ts” and BankRate.com’s “1o things to weigh before diving into income property.” You’ll also find more in these posts: “Ups & Downs of Second Home Rental,” “List Your Home for Short-Term Rent? 3 Key Questions,” and “10 Short-Term Rental Mistakes for Hosts to Avoid.“
Do you own a second home? Any other tips for our readers who are thinking of buying one? Leave them in the Comments below or on our Facebook page.