Is a second home a smart investment or just needlessly taking on more debt?
During the last housing boom many scooped up several second homes as investments and for enjoying weekends away at theme parks, by the beach or in ski and golf resorts but do they really make wise investment choices?
Many find this a tricky question. A primary residence should always be distinct from any investments and really its equity shouldn’t be tapped to fund other real estate investing, even though there are many advantages to doing so. However, a second home is a different animal.
If you have to take out a mortgage to afford it then plowing money into a second home every month could just be an expensive a luxury. Do you really want to be glued to it?
Buying a vacation home that you will use regularly can be more affordable and comfortable than hotels, especially for families. If you are confident in your income remaining consistent and have 6 months worth of living expenses and debt service set aside and have enough income left over every month to be socking away plenty for retirement then why not treat yourself to buying a vacation home?
However, be realistic, a vacant property is going to bring additional expenses even if you don’t have a mortgage. Buy in the right area and it could still produce far superior returns with more security than other options out there today. In fact if there has ever been a time to do it, it is now.
A second home can also be rented when you aren’t using it. In resort areas this could bring in significant seasonal rental rates at two or three times local annual rent rates. That means leasing it out for just 3 to 6 months could make it pay for itself while appreciation accumulates.
While speculating on future appreciation and equity growth isn’t the soundest real estate investing strategy we are certainly on the verge of a great period of growth, just watch your housing cycles and know when to cash out for maximum returns.
