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Second Homes: Buy or Rent?
Many assume a second home means purchasing a house, condominium, or mobile/manufactured home. However, some have long-term rentals that they call their second homes.
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 renters (e.g., houses or apartments) consider their abodes home, you can also rent your second home.
When does a rental become a second home versus a vacation or other temporary arrangement? Here are some suggested parameters:
The longer the rental duration, the more likely you are to consider the property a second home. For most people, a longer-term rental of 3 to 12 months could qualify as a second home.
If you return to the same long-term rental year after year, it's much easier to confer second-home status on the property.
Take the hypothetical example of a Michigan couple renting the same Florida apartment every year from the first week of November through the second week of 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. They no longer pay Michigan state income tax because they only live in Florida for just over half of each year.
Given this scenario, it's easy to see how this couple considers their Florida apartment a second home.
Buying Vs. Renting
The decision to buy or rent a second home involves most of the same factors as the decision to buy or rent a primary home. At a high level, the decision depends on the current housing market, along with your unique financial situation and personal preferences.
Buying Advantages
Buying Disadvantages
Renting Advantages
Renting Disadvantages
Rental Costs
While rent is the major cost, renters face many other possible expenses. Here are a few:
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How to Decide?
Both personal and economic factors inform the decision to buy or rent.
The personal factors include answers to questions, including:
Economic factors include answers to questions including:
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:
For the rental part of the scenario, find this data:
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.
The analysis, using hypothetical numbers, 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.
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