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Rental Trends: Investing in Vacation Property and Managing Your Future

by ARLnow.com Sponsor July 13, 2016 at 3:45 pm 0

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This biweekly sponsored column is written by the experts at Gordon James Realty, a local property management firm that specializes in residential real estate, commercial real estate and home owner associations. Please submit any questions in the comments section or via email.

Real life isn’t a day at the beach. But investors interested in vacation or resort properties can see that day at the beach in their future. Today, we look at the implications and advantages of investing in vacation property.

Of course, this investment opportunity isn’t just for beach lovers. You may prefer mountain vistas, country farmlands, a dessert oasis, or even the lights of the big city. No matter the type of location, investing in property where vacationers enjoy spending time is a big lure. It is enticing to think about purchasing a home in your ideal location to add to your portfolio. You can use it a bit yourself and then rent out for the remainder of the year – or at least during peak seasons – to help cover the mortgage and other expenses. The appeal is real, but there are serious considerations for the investor.

Real World Implications for Investing in a Vacation Home

Purchasing a second home can become a heavy financial burden for many owners. Regardless of whether it will be used as personal residence or an investment property, many experts advise against purchasing a second home unless you can pay for it with cash. In addition to the initial financing of a vacation home, owners must realize:

  • The property may be vacant 90 percent of the year
  • Upkeep is required for the property to maintain value
  • You’ll see increased insurance premiums
  • Security issues may need to be addressed
  • There may be significant tax repercussions

The U.S. Internal Revenue Service frequently changes the tax rules governing the use of second homes and investment class homes. Lending institutions also make loan determinations based on the declared use of a second home versus investment class residential property.

Personal Use

How much time you spend using your vacation home determines how the IRS classifies your property and what your tax obligations will be. A vacation home is considered a personal residence if the owner uses it more than 14 days a year or more than 10 percent of the total number of days the property is rented. In those cases, the IRS limits the rental expense deductions to amounts equal to or less than your rental income.

If you rent the home out for 14 or fewer days, you don’t need to report the rental income and you can deduct the mortgage interest as a personal deduction.

Rental Use

If a homeowner uses the residence for fewer than 15 days a year or less than 10 percent of the time the property is rented, the IRS considers the home an investment property for income tax purposes and you must report your rental income. Financial institutions also treat the home as investment class property.

If you use the home for more than 14 days and also rent it for more than 14 days, you’ll have to calculate the percentage of time for each use to determine how to handle deductions. So, if you rent out the home 25 percent of the time, 25 percent of deductible expenses, such as mortgage interest and repairs, can be deducted to offset rental income.

The Upside of Vacation Real Estate Investing

The complexities of investing in vacation property may seem daunting, but there is a financial upside. Most properties located in desirable, popular locations enjoy higher than average appreciation. Savvy investors seeking bargain purchases may also find sweet deals in vacation destinations, because second home sellers are often motivated to sell quickly and foreclosures can be more common. Fluctuations in markets can create significant gain or immediate losses in vacation real estate ventures.

Expert Guidance and Management

Vacation and resort property real estate presents exciting options for investors, but the risks are considerable. As with all real estate speculation, industry experts are the best source of guidance. Trusted accountants, lawyers, real estate agents, property management services experts and loan brokers make up the A-team for any successful portfolio.

Vacation and resort investments also require more marketing and property management work. Rather than finding suitable tenants once every few years, vacation properties typically turn over every week. Rental competition in the destination is often fierce. And with every new tenant the property becomes vulnerable to damage and wear and tear. Partnering with a solid, reputable property management company will help you protect the investment, especially if you live too far away to keep an eye on the property yourself.

Read more in our series Investing in Your Future.

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