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The American Dream has undergone a fair amount of change over the last 50 years. Sometime after cars and televisions became a regular part of even the lowest income earner's life, it became fashionable to buy a second home - a vacation home. These are the cottages on the lakeside, the cabins in the mountains and the huts on the beach that all sit empty 90% of the year while their owners are banking time for the next vacation - and footing the bill for the mortgage and property taxes.
There is, of course, an alternative to letting your cottage molder during the down time. You can rent it out to other people looking to enjoy some time away from work. This article will look at some of the issues that surround renting out a second home.
Buying a Second Home
Keeping a primary residence is an enormous financial decision. Keeping a second home is a step up in magnitude because a second home has all the costs (often more) of your first home without the easy write-offs from the IRS. By and large, second homes are often a terrible financial burden, rather than a good investment. One of the litmus tests of whether you should have a second property is whether you can handle an all-cash purchase. This will help you to avoid passive losses because your mortgage payments will be non-existent. (To find out more about mortgages, see How Will Your Mortgage Rate?, Understanding the Mortgage Payment Structure and Paying Off Your Mortgage.)
If you are set on getting a vacation home but don't have the capital for an all-cash purchase, do not take a second mortgage on your home. The IRS has closed the loophole whereby a person could use a second mortgage to purchase a separate investment property while still deducting his or her mortgage from taxes. If you take a mortgage on your primary residence to buy a second home, you will not be allowed to deduct the payments as personal mortgage interest. If you intend to borrow for a second home, you will have to settle for another mortgage that is not tax deductible. Again, it is probably best to hold off until you have enough capital to buy the property outright.
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