OT: Anyone own a second home?

[nittanyfan333]

We're starting to have discussions about what we can do to use our beach house as a tax shelter/income producer, as well as any additional benefits. Thing is, I have NO CLUE how to go about doing it and what steps need to be taken. Do we need to start an LLC and put the house under it? Don't we need to?

Just looking for any first-hand knowledge of what our options are and how to go about implementing them.

Thanks very much for your help!

 

[psuro]

I don't own but have done some research.

1. Get a realtor/property management company to handle the rental transactions. Don't try to do it yourself. It's too much of a headache.
2. An LLC is not a bad idea - use that to get into a contractual relationship with the realtor/property management company.
3. Talk to an accountant and/or financial person regarding the tax shelter/passive income producing aspect.
4. Set your rental rates to cover the times your property is not rented (although the local rental market will determine that).
5. Research your area on realtor.com, AirBnB, VRBO, etc to see what others are charging for similar.
6. Determine in advance how much of a financial investment you want/have to make to update the place before renting. Chances are you will need to do some things in order to make it attractive.
7. Set your standard as to the type of renters - if you have a house at the Jersey shore, you will get college kids and families who want to rent. You may want to be selective as to what groups you want/don't want.
8. Be prepared for some damage every year. You need to factor the costs of fixing things into your rental price.

Good luck.

 

[CvilleElksCoach]

I don't own but have done some research.

1. Get a realtor/property management company to handle the rental transactions. Don't try to do it yourself. It's too much of a headache.
2. An LLC is not a bad idea - use that to get into a contractual relationship with the realtor/property management company.
3. Talk to an accountant and/or financial person regarding the tax shelter/passive income producing aspect.
4. Set your rental rates to cover the times your property is not rented (although the local rental market will determine that).
5. Research your area on realtor.com, AirBnB, VRBO, etc to see what others are charging for similar.
6. Determine in advance how much of a financial investment you want/have to make to update the place before renting. Chances are you will need to do some things in order to make it attractive.
7. Set your standard as to the type of renters - if you have a house at the Jersey shore, you will get college kids and families who want to rent. You may want to be selective as to what groups you want/don't want.
8. Be prepared for some damage every year. You need to factor the costs of fixing things into your rental price.

Good luck

We own a second home. We don't rent it as I have enough pains in my ***, I don't need more. But I would agree, the list above is pretty accurate. I would emphasize that including number 8 into number 4 is very important or you will have your cash flow impacted with general repairs and possible damage.

I would also suggest including security cameras at least outside and a security system in general. Create a locked space or room for which only you have access to secure important items to you within the house so the renters don't have access like electronics or alcohol.

Happy hunting

 

[nittanyfan333]

I don't own but have done some research.

1. Get a realtor/property management company to handle the rental transactions. Don't try to do it yourself. It's too much of a headache.
2. An LLC is not a bad idea - use that to get into a contractual relationship with the realtor/property management company.
3. Talk to an accountant and/or financial person regarding the tax shelter/passive income producing aspect.
4. Set your rental rates to cover the times your property is not rented (although the local rental market will determine that).
5. Research your area on realtor.com, AirBnB, VRBO, etc to see what others are charging for similar.
6. Determine in advance how much of a financial investment you want/have to make to update the place before renting. Chances are you will need to do some things in order to make it attractive.
7. Set your standard as to the type of renters - if you have a house at the Jersey shore, you will get college kids and families who want to rent. You may want to be selective as to what groups you want/don't want.
8. Be prepared for some damage every year. You need to factor the costs of fixing things into your rental price.

Good luck.

We own a second home. We don't rent it as I have enough pains in my ***, I don't need more. But I would agree, the list above is pretty accurate. I would emphasize that including number 8 into number 4 is very important or you will have your cash flow impacted with general repairs and possible damage.

I would also suggest including security cameras at least outside and a security system in general. Create a locked space or room for which only you have access to secure important items to you within the house so the renters don't have access like electronics or alcohol.

Happy hunting

Thank you both. We initially bought with the idea of it being a vacation home (brand new build). After owning for 6 or so months and evaluating how much we use it, I want to start looking down the path of doing a homeaway/AirBNB/VRBO kind of deal, to rent it out one or 2 weeks a month. If we were gonna be doing long-term rental on it, absolutely we would be doing a management company. It's only an hour and a half from our primary residence, so i've thought about managing it myself, but that's still in the air.

 

[Nitwit]

I’ve owned a second home at the beach for about 20 years and rented it for the first two. After that we decided we liked it too much to want to share it with others. My advice is to either buy a property as a rental investment or buy it for your own vacation enjoyment but don’t try to do both. You will resent the renters for moving the vegetable peeler to a different drawer and sleeping on your mattress, or staying in your home during perfect weather when you wish you were there. If you want an investment, don’t plan on using it yourself. That way you can furnish it differently and maximize cash flow.

 

[Nitt1300]

lawyer up- seriously

 

[mmp121]

My parents have had multiple condo's at the Jersey shore (Wildwood Crest) over the last ~18+ years. They had rental property in mind as their primary use case from the get go, and planned for us to use it for personal use on weekends when it wasn't rented (during the summer months).

Everytime we wanted to use it, we had to haul down a car loads of stuff, as what @Nitwit said is 100% correct. We wish we had the place ready and waiting for us to use instead of having to bring all our personal nick nacks for a weekend or week long stay.

Also everything on @psuro list is applicable. Lots of work, even when renters are there, and something goes wrong (fridge / toilet / HVAC / TV / internet / WiFi) its your problem. Parents learned too late to have a local handy man to deal with the constant calls and hassles from renters. And even though they were not as close as you are, managing the property is a full time job, especially when you want to have work done in the off-season, EVERYONE else is also having work done in the off-season, so finding a good handy man is essential.

Good luck!

 

[1995PSUGrad]

We just sold our beach place. We have only had it for a few years. With Covid and working from home we were able to spend several months there the year before last, not as much this year. We made a lot of money off of the rent. You will make more if you rent it out yourself, but then there are more headaches, too, so I recommend a property manager to handle that for you.

My wife always wanted to stay there, I always wanted to rent it. You can't have it both ways! We only sold because the value had increased so much in the past couple of years. We made a lot on the sale.

Message me if you want some more specific information.

 

[Ktownlion]

I’ve owned a second home at the beach for about 20 years and rented it for the first two. After that we decided we liked it too much to want to share it with others. My advice is to either buy a property as a rental investment or buy it for your own vacation enjoyment but don’t try to do both. You will resent the renters for moving the vegetable peeler to a different drawer and sleeping on your mattress, or staying in your home during perfect weather when you wish you were there. If you want an investment, don’t plan on using it yourself. That way you can furnish it differently and maximize cash flow.

This is very good advice. Especially not finding the vegetable peeler in its correct spot, among most other things. Good forbid they use the martini shaker as a make shift vase for flowers....I could go on, but you get the picture...

 

[Ktownlion]

I don't own but have done some research.

1. Get a realtor/property management company to handle the rental transactions. Don't try to do it yourself. It's too much of a headache.
2. An LLC is not a bad idea - use that to get into a contractual relationship with the realtor/property management company.
3. Talk to an accountant and/or financial person regarding the tax shelter/passive income producing aspect.
4. Set your rental rates to cover the times your property is not rented (although the local rental market will determine that).
5. Research your area on realtor.com, AirBnB, VRBO, etc to see what others are charging for similar.
6. Determine in advance how much of a financial investment you want/have to make to update the place before renting. Chances are you will need to do some things in order to make it attractive.
7. Set your standard as to the type of renters - if you have a house at the Jersey shore, you will get college kids and families who want to rent. You may want to be selective as to what groups you want/don't want.
8. Be prepared for some damage every year. You need to factor the costs of fixing things into your rental price.

Good luck.

Very good list of things to think about. One other point if you currently own the house as an individual, ensure you are aware of the potential tax implications of moving it into an LLC.

 

[MrTailgate]

A couple of additional points to consider-

1. Be aware of the time rented and how this impacts the property. For instance, one possibility is to rent it for two weeks so that any income earned for that period is not taxable and has no impact on the property classification.

2. If you go the opposite route and the property is a rental, be aware of the passive rental real estate laws. You might be able to claim a passive rental loss to shelter regular income but the loss might be deferred if your adjusted income results in the loss not being utilized currently.

3. Regarding 2, the Biden tax plan calls for the elimination of the passive loss provisions. So this very attractive provision might be eliminated reducing the benefits of the rental aspect.

4. Also consider the long term aspects of having a rental and then converting to primary residence. There is the ability to exclude the gain on primary which is attractive so that the period the property is a rental is disqualified use. So say you rent the property for 5 years and then convert to your primary and live there for 5 years as your primary before divesting. You have satisfied the 2 year rule so your exclusion would be 50% of the gain.

5. Regarding 4, if this is NJ, be very aware on impact of NJ residency being established and impact on retirement distributions from 401’s, pensions, etc. It’s a land mine, you will need advice.

These are additional points beyond those noted above.

 

[nittanyfan333]

Very good list of things to think about. One other point if you currently own the house as an individual, ensure you are aware of the potential tax implications of moving it into an LLC.

Say more

 

[troutrus]

Prices are waaaaay up. Good time to sell. Some places are already seeing water in the streets on a regular basis (see Nags Head, NC) , and prices are slipping.

Scientists watch giant ‘doomsday’ glacier in Antarctica with concern

Cracks and fissures stoke fears of breakup that could lead to half-metre rise in global sea levels – or more

www.theguardian.com

 

[Big_O]

Had two homes a couple of times in my life because the market was bad when we wanted to sell the second home and we didn’t want to sell it at a loss without being able to write off the loss. Because of that, we rented for a couple of years and then sold them. First time we lived a couple of hours away and did our own property management. The second time we were about a 1000 miles away and used a property management company. Since we sold the properties at a loss, we were able to write off the loss. The property management fees made it so we could just break even on expenses (mortgage, insurance, taxes, maintenance, etc.) but we were not making money. This was true both times.

After my experiences, I never want to ever own rental properties without being being a “real estate professional” according to IRS criteria because there are no advantages. Too much of a headache. If you want to buy a second property, do it when prices are rock bottom, which they are not now.

 

[Liontown]

Prices are waaaaay up. Good time to sell. Some places are already seeing water in the streets on a regular basis (see Nags Head, NC) , and prices are slipping.

Scientists watch giant ‘doomsday’ glacier in Antarctica with concern

Cracks and fissures stoke fears of breakup that could lead to half-metre rise in global sea levels – or more

www.theguardian.com

Way to stay on topic.

 

[Metal Mike]

We bought a property in Florida and rented it out for 7 years while we worked to pay it off before retiring. 1. The property only rented in winter the high season in Florida. 2. At first we used a management compay and found we could do better ourselves and did not have to pay the "management fee". 3. We did form an LLC and got advise from our tax guy.
We got lucky we found a couple who wanted to rent our place for the winter and they came back for several years. They were great tenants. After retirement we no longer rent the place and use it ourselves in the winter. One of the hard things was telling the couple we would not be renting it anymore.

 

[johnmpsu]

Some good advice here. We have owned a second home in the Vail valley for about 7 years. We are there during the 6 month ski season and rent the rest of the year. The best advice I can give you is hire a good LOCAL property manager with a stellar rep who has been in business for a while. One that knows the area very well with lots of local contacts and customers. Look at the places he currently manages. That is, who are his current customers. My feeling was that since he had many customers with homes way more expensive than mine that liked him, he was probably pretty decent. He also screens the potential renters and clears them with us. He always respects our wishes and communication is excellent. Stay away from the national management companies. We tried that for a couple of years and I was not happy. I'd also hire a good accountant to do your taxes. Good luck. It has paid off for us.

 

[Ktownlion]

Say more

I am not entirely sure, but you might be subject to transfer tax if effectively changing ownership from individual to LLC. When I bought a second home in SC, my realtor advised me of this, as I had intended to buy it personally and then potentially move it into and LLC.; I aborted on that option, so never did the due diligence to any extent, just bought it personally. Also, I know at the company where I work (big company, lots of legal entities) this is always an issue.

 

[MrTailgate]

I am not entirely sure, but you might be subject to transfer tax if effectively changing ownership from individual to LLC. When I bought a second home in SC, my realtor advised me of this, as I had intended to buy it personally and then potentially move it into and LLC.; I aborted on that option, so never did the due diligence to any extent, just bought it personally. Also, I know at the company where I work (big company, lots of legal entities) this is always an issue.

Yes, you raise a good point. If you have a mortgage on the property, it’s a strange process. You won’t get a mortgage with the property acquired by the LLC. So, you have to acquire the property as an individual and then transfer it into the LLC. Transfer tax will be imposed. Be careful here though as the lender might call the loan when the property is transferred to the LLC. The one positive is that the mortgage interest rate you got initially as the property being a second home is lower and won’t be adjusted upward to the rate charged on investment properties.

Another point to consider is the lending process. If the process is for the property to be a second home, you won’t be able to “claim” the rental income for purposes of debt service. If you get lending with the property as an investment property, you can “claim” the income for purposes of debt service but your rate on the debt will be higher. So, a lot to consider.

One last thing. If you ever want to acquire a rental property do it before you retire if you plan on debt. The lender looks for income so lacking a W-2, they make it an involved process regardless of the assets you have. You might have to schedule distributions for a month or two and then cancel further distributions. It’s a ridiculous process that they will give someone a mortgage with a healthy W-2 who might lose their job the next day versus a retired person with a lot of money who could satisfy the debt 10 times over if they choose to do so.

 

[nittanyfan333]

Thank every one of you (except for the global warming nonsense). Too many posts to individually respond. Much appreciated.

Big thing is we really enjoy the place, but might get there for one weekend a month. Love letting friends and family use it though. But I was looking the other day and the thought popped into my head that we might be missing opportunities to make some money with it.

 

[Nohow]

Thank every one of you (except for the global warming nonsense). Too many posts to individually respond. Much appreciated.

Big thing is we really enjoy the place, but might get there for one weekend a month. Love letting friends and family use it though. But I was looking the other day and the thought popped into my head that we might be missing opportunities to make some money with it.

Buy a timeshare. You are the kind of sucker they are looking for.

 

[nittanyfan333]

Buy a timeshare. You are the kind of sucker they are looking for.

Great addition to the conversation. Good luck

 

[psualt]

Consider renting it for two weeks or less a year and not reporting the income. You can still get the mortgage interest deduction if you itemize and don’t have to claim the income.

 

[Liontown]

Buy a timeshare. You are the kind of sucker they are looking for.

NoHow should change his name to NoClue. This thread is not about timeshares. Pay attention.

 

[Nitwit]

Prices to buy are way up due to Covid-19. More people are working from home and that increased demand for shore homes as people decided to live there during the off season to work and make it their primary residence. They are tearing down million dollar properties and building two million dollar properties on every block near me, even with increased flooding issues (global warming?). It’s not a good time to buy unless you are downsizing from someplace else even more expensive than what you’re getting into and changing your primary residence. Wait foor the bubble to burst-if it ever does. Everyone wants to be the last one onto the island and properties are scarce.

 

[nittanyfan333]

Prices to buy are way up due to Covid-19. More people are working from home and that increased demand for shore homes as people decided to live there during the off season to work and make it their primary residence. They are tearing down million dollar properties and building two million dollar properties on every block near me, even with increased flooding issues (global warming?). It’s not a good time to buy unless you are downsizing from someplace else even more expensive than what you’re getting into and changing your primary residence. Wait foor the bubble to burst-if it ever does. Everyone wants to be the last one onto the island and properties are scarce.

Although I didn’t specifically state, I think I made pretty clear that we already own the house.

 

[Nohow]

NoHow should change his name to NoClue. This thread is not about timeshares. Pay attention.

Just a harmless suggestion. No need to get snippy about it.

 

[nittanyfan333]

Just a harmless suggestion. No need to get snippy about it.

Ok cool. Appreciate the suggestion. We won’t buy a 3rd house

And you thought my previous response was “snippy”??? Oh boy….

 

[Roswelllion]

So we have a home on the beach in NC. Built in new in 2001. It has been a terrific investment. We actually stay there in spring and fall and rent it all summer. It has effectively paid for itself. (We will pay it off this spring) Lots of good advice in the thread. We use a prop management company and pay 14% but it makes it hassle free. An hour and a half doesn’t seem far but if it is the busy beach season and you have an AC or plumbing or electrical problem it helps to have someone who knows everyone in town. I would recommend an LLC and an umbrella liability insurance (it is cheap) Covid has greatly increased prop values and rentals at almost all beach communities. You should decide if you want to use it yourself primarily and try to pick up some occasional renters utilize it for some passive losses or go full bore for rental income. That will affect some of your decisions that have been discussed above.