The choice between buying or renting a vacation home
is an important financial decision for many adults, but now, with
the advent of peer-to-peer rental sites, the choice has gotten a
little easier. Online services like Airbnb and VRBO have changed the
game — both for those looking to make supplementary income from a
property they already own and those trying to decide if purchasing a
second home is the right option.
Buy or rent? There are obvious advantages to both sides of the argument.
Owning a property builds equity and gives you total control over how you
use the home. Renting, on the other hand, means you are not tied down to
one location, and you only pay when you play.
So how do you know what is right for you?
Buying Into Ownership
James F. Marshall, president of Spectrum Investment Advisors in Mequon,
says that his company generally considers a second home a good
investment only if it’s in a good location and can generate rental
income. “Don’t buy a second home on emotion. It should be a sound
business decision,” he says. “And don’t plan on a positive cash flow
initially on your second home, but rather plan on having to offset some
of your expenses with cash.
“The location is going to be the key as to whether or not (the home) is
going to be a sound investment. Lake homes generally increase in value
compared to a home that’s not on a lake,” he says. “And be wary of golf
course homes because the value of your property is tied to the value of
the course itself, and that can change as new courses are built in the
For Jim Cantrell, president and founder of Financial Strategies in
Brookfield, real estate should be part of a well-constructed, properly
diversified portfolio. “Purchasing property is not the only way to go
about investing in real estate,” he says. “If it’s strictly for
investment purposes, I recommend real estate mutual funds or exchange
traded funds to get that asset class exposure; both offer much more
liquidity than a second home. In the long run, however, the likelihood
of losing money on a second home is lower than many equity investments.
If assets are needed to fund retirement goals, one may be able to sell
the second home to cover those goals.”
Marshall says buyers also need to consider maintenance, property taxes
and ease of access. “We believe purchasing a second home on a lake in
Wisconsin is likely to be a better investment than purchasing a second
home out of state,” he adds. “We have a number of clients who have
purchased homes in Florida and Arizona, only to sell them five years
later because of inconvenience. It’s simply a lot easier to use and
maintain a home that is nearby, and the cost of flying your whole family
out of state can get very expensive.”
Renting for Income
If you do decide to buy, no matter where the home is, the best way to
generate rental income is by listing the home with one, or both, of the
two most popular peer-to-peer vacation home sites: Airbnb and VRBO.
Getting your listing up and running is as easy as setting up a Facebook
page for the property — you post good photos, write a nice description
and pick a rate. That’s about it. Both services offer tips and advice,
from getting the home ready and including what services to offer to
choosing a rate and understanding the local laws.
One place these two services differ is in the cost to the homeowner.
VRBO offers either an annual subscription fee of $349 for properties
with online booking or an 8 to 10 percent fee on pay-per-booking.
Listing with Airbnb is free, but the company collects a 3 percent
service fee on the amount of each reservation. With Airbnb, guests are
charged before they arrive, and the company handles all payments. Hosts
receive their payment within 24 hours of check-in — either through
PayPal, direct deposit or international money wire. Renting through
Airbnb also includes a $1 million host insurance program, which protects
the home from damage and the host from liability if the guest gets hurt.
Every host with a listing on Airbnb is eligible for coverage at no
If rental income is a key determinant in your purchase decision,
carefully study the local renter market to calculate possible income.
With the money rolling in, Marshall says you also need to understand how
this income affects your taxes. “There are definitely implications and
restrictions, and they vary greatly from one place to another and
according to your income level,” he explains.
If you rent a property for fewer than 15 days during the year, you do
not include the rent you receive in your income, and you do not deduct
rental expense, says Cantrell. “On the other hand, if you rent your home
for 15 days or more during the year, things change,” he continues. “Now
it is more like a business, and the tax implications become more
complex. In most cases, the expenses of renting your property, such as
maintenance, insurance, taxes and interest, can be deducted from your
“Owning a second home can be a positive experience and a sound
investment, but it is not for everyone,” says Marshall. “Just make sure
that you own the home and the home doesn’t own you. If buying makes your
family budget tight, try renting instead. This will also give you time
to see how well your family gets along at a cottage for a week.”
Finances aside, in the end, that may be the deciding factor.