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Is Owning A Second Home Worth It?

Second Home Overgrown© by courtesy 181-Close-Now LLC

We’ve all heard the myth that owning is better than renting. But is owning a second home worth it? Is this also just a myth? Today I wanted to take a closer look at the topic so you can make a more informed decision.

Owning vs Renting

First lets start with the age old myth that owning is better than renting in general. I get a lot of clients who are looking to buy their first home because people tell them it’s better to own than to rent. The truth is it varies on a case by case basis. In a lot of cases renting is the superior option.

When you rent a property you are liable for the monthly payment and any insurance premiums. Since renters insurance is usually a minimal expense with minimal coverage this keeps the overall cost of renting low. As long as you take care of the property and don’t damage it you may even get your deposits back.

Now let’s look at the costs of actually owning a home. You have to deal with the yard which is fine during the winter but during the summer will take time out or you will have to pay someone out of pocket. If anything breaks or needs repairs you are going to have to pay for those as well. Homeowners insurance provides a lot more coverage than renters insurance so it also has much higher premiums. As a homeowner you are also responsible for property taxes.

Those are just the regular liabilities that come with home ownership. When you get ready to sell a home you will likely have to invest additional money to update it. That means new paint, new flooring and carpet and likely new fixtures. There will be an inspection and anything that doesn’t pass inspection will have to be fixed before a sale can be completed. That’s a lot of additional cost just to say you own a home.

Where Does This Myth Come From?

Real Estate is one of the few classes of assets that has a pretty strong record of appreciation. As a home ages it becomes worth more than it was when you bought it. When you rent a property you aren’t entitled to appreciation because you can’t sell the property. This is where the myth of ownership being superior originates. If you buy a home in a market that is experiencing rapid appreciation then owning may in fact be superior than renting. But appreciation is rarely guaranteed.

There are many markets across the country that experience little or no appreciation. Take a market like Detroit where properties have experienced hyper deflation for example. Another good example would be more rural communities where there is little demand properties in general.

This is also why you hear horror stories when an economic downturn hits. Even in a fast appreciating market the market can swing the other direction. Speculators will often buy up properties when a market is appreciating quickly and if they sell at the right time they may make money. Unfortunately when the economy shifts they can also lose big. It’s fairly common to hear stories of someone who held onto a home too long and it was worth far less than what they paid during a period of high appreciation.

Is Owning A Second Home Worth It?

Let’s assume that you already looked at the pro’s and con’s of home ownership. You looked at your local market, your income and career field and decided that owning a home was better for you than renting. Congratulation’s! But does it make sense to own a SECOND home?

You may have bought a second home as a rental property. Maybe it was something you inherited. The question then becomes does it make sense to hang onto it?

Is Your Rental Property Making You Money?

My first question is always whether or not a rental property is making you money. I don’t mean did you clear $50 in free cash flow this month. Does the property make you money on a yearly basis? When you factor in all the repairs, insurance, mortgage payments and unexpected costs does the property actually produce a profit?

If the answer is no then maybe it’s time to reconsider that rental. If all you’re doing is paying down debt it may be time to look at the numbers again. Paying down debt is great but remember appreciation is never guaranteed. Will the house really be worth what you paid for it or more down the road? What is the neighborhood becomes undesirable? How many repairs and updates will you need to make when it’s time to sell and what will that cost you?

A Vacant Property Can Be A Nightmare

If your property is vacant that comes with a whole new set of problems. A vacant property doesn’t produce any cash flow. Vacant properties can also be a living nightmare from people breaking in, tearing out copper, squatting or even burning the place down.

When you have a house you don’t have a cash flow generating asset; you have a massive liability. You also have to consider the amount of work it’s going to take you to try and find a new tenant to lease that property. Will you have to make more repairs and updates in order to attract new tenants? What kind of costs will you have out of pocket to make the house desirable? Most importantly how many months of rent do you have to collect to cover those costs? These are all important questions to consider if your property is currently vacant.

Inherited Homes

Inherited homes come with even more issues than rental properties. Usually you aren’t expecting to become the owner; you suddenly have a new house to deal with. Sometimes an inherited home may be too nice to be a rental. Other times it may need a lot of out of pocket repairs or updates before it would be appealing to tenants.

Most people who end up inheriting a house also don’t really want to be landlords. Since you likely already have a home of your own (or decided renting was the smarter choice for you) this adds an additional layer of complexity to the issue. So what do you do?

Evaluate Your Circumstances

The first step is to evaluate your circumstances and see if owning is better than renting for your primary residence. Hopefully you’ve already tackled this issue.

Second, evaluate whether or not it makes sense to own a second home. Is it making you a profit at the end of the year and does that profit justify all the extra work and risk? If the answer is yes then you’re in the small minority who may benefit from owning a second home.

If the answer is no maybe it’s time to rethink that second home. Especially if that second home is cash flow negative, vacant or was recently inherited. Just like owning a primary home vs renting whether or not you should own a second home is something you will need to evaluate on a case by case basis.

Simpler May Be Better

If you own a second home and decide that you would be better off without the added liability and effort consider selling. Even if your home is in less than perfect condition there are companies like 181-Close-Now that buy houses even if they need repairs.

If you got really lucky and your second home doesn’t need any repairs or updates you may simply need a good agent. Some of my clients have tried using property management companies but typically the costs outweigh the benefit. It’s usually a situation where doing it yourself makes sense or it just makes more sense to sell that second home altogether.

Remember that home ownership is always a case by case basis. What works well for you may not work well for the next person. This is just as true when considering owning a second home as it is when deciding whether you should rent or buy your primary residence. In the end you have to do what makes sense for YOU. After all; you’re the one paying the bills.

Written by Stanley Simmons

Stanley has been a real estate professional for 30 years and loves sharing his information with others.

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