The advent of Airbnb transformed the vacation home market. People learned that besides providing some extra cash from your spare bedroom, buying a second home lets you enjoy the best of two worlds. You can simultaneously avoid expensive hotel expenses when vacationing and invest in profitable real estate.
The idea of owning multiple homes intimates many people despite its benefits, including giving you flexibility for geographic arbitrage and access to several tax benefits. However, the truth is that vacation real estate investing is lucrative and straightforward.
Real Estate Historically Has Outperformed Other Investments
Real estate investing is extremely profitable. Despite its drawbacks, it consistently outperforms other forms of investments. Many seasoned investors historically prefer real estate to other investment options for several reasons.
- Consistent Cash Flow. Once you purchase a residential property, you can rent out the space. The rent payments you receive from tenants improve your monthly income.
- Passive Income. Investing in real estate is the most effective way of generating passive income. You can delegate the duty of managing the investment to a property manager.
- Security in Equity. In real estate, you build up your equity with every mortgage payment that you make or by making improvements to the house. Your capital also grows as the value of the property rises.
- A Safeguard Against Inflation. Real investments protect you against inflation because as the prices of goods and services rise, so does the value of your investment and the rent income it generates.
- Long-Term Security. Real estate investments are long-term. You own the home for several years for your capital to grow and to generate a monthly income if you rent out the property.
- Tax Benefits. Real estate investments come with tax advantages. Many investment property expenses, such as mortgage interest, property taxes and repairs/maintenance, are tax deductible. Additionally, capital gains tax is typically lower than income tax, so you save on taxes.
- Appreciating Value. The value of real estate investments tends to rise over time, so this form of investment offers relatively high returns on investments over the long term.
- Diversification. Investing in real estate is an effective way to diversify your investment portfolio. Doing so hedges your portfolio against economic downturns because your risks are spread out.
- Ability to Leverage Financing. Like most people, you may not be able to pay full price upfront for real estate properties. Thankfully, in real estate, you can use leverage (other people’s money) to buy investment properties. You can use financiers, such as mortgage lenders, banks and credit unions, to secure funding for your investment.
- Control and Fulfillment. The benefits of real estate investing extend beyond finances. It empowers you to be your own boss, which many investors find fulfilling. It also gives you opportunities to positively impact your community by providing quality and affordable housing to residents and businesses.
Vacation Real Estate Investing Is a Superior Real Estate Investment
Vacation property investment comes with several unique benefits:
- Potential capital gains
- Tax incentives
- Better income than long-term leases
- Freedom to furnish and renovate
- Excellent venue for gatherings
Your vacation home's location determines the tax benefits. Visit the IRS website to check everything from tax breaks (clergy, military, etc.), property depreciation and several other tax breaks.
Property appreciation is among the important considerations to make when assessing a vacation home investment. Consider how much the property will be worth if you sell it later. Tax advisors can help you make good projections based on historical data.
In general, short-term rentals, which range from a few days to months, tend to outperform long-term rentals, which extend for more than one year. Major tourist cities, such as San Diego, New York, Lake Tahoe and Miami, are more suited for vacation destinations than family home bases.
Down payments and mortgage rates for vacation homes are more favorable than those of investment properties
Getting a mortgage loan involves a lot of paperwork. The better your credit score, the lower your mortgage loan rate. The loan rates are also lower if you plan to live in a home. They can go as low as five percent of the asking price for a first home.
The down payment for a second home is usually around 10 percent down, and the mortgage rate is typically 0.05–1 percent higher than the rates for a primary residence. Investment properties are not as restrictive. You don't have to live in the home.
However, the down payment for investment properties is 15–30 percent, and the mortgage rates can be 2–3 percent above those of primary homes. As a result, after living in their primary home for more than a year, many people choose to buy a second home to move into, then make their current home a short-term rental property.
Nonetheless, if you do the math, you'll find that you can still make substantial profits by purchasing a second home outright. Crucially, review your finances carefully to determine the most suitable mortgage product in the long run.
Vacation homes are more consistent than hotels and more flexible than timeshare arrangements
Hotels lack consistency. They book up, change ownership and shut down. Moreover, their prices are unpredictable, offering cheap getaways in one season and charging exorbitantly in another. They also have several restrictions around pets and additional guests, further diminishing your comfort.
Then there's a timeshare, which has a history of being extremely problematic. A timeshare and a vacation home are by no means the same thing. To begin with, a timeshare is not an investment given how little the resale value is after its paid for. Good luck selling if the timeshare has an outstanding loan.
Vacation Real Estate Investing: The Traditional Private Ownership vs. Co-Ownership
The traditional way of identifying prospective vacation homes to buy isn't different from that of finding a primary or personal residence. You run a search on listing sites, such as Zillow, Realtor and MLS, to explore the prices in various markets.
Once you zero in on a few options, you call an agent. You'll likely have an initial call to let them know your goals and your budget. This is the point where you inform the agent that you intend to rent out the vacation home. That way, they can check whether the building and community allow this arrangement.
Many homeowner's associations set limits on short-term renting. Most people are familiar with the idea of purchasing a vacation home with a group of friends. It may even have sounded enticing at some point.
But, as many people have come to find out, these traditional co-ownership arrangements are fraught with challenges, such as conflicting schedules, shirking of responsibilities and issues related to joint bank accounts. For these reasons, a new co-ownership model emerged: joint ownership of a vacation home via an LLC.
Benefits of Investing a Vacation Property Investment via LLC With Lifestyle Asset Group
Joint ownership via an LLC refers to an arrangement in which multiple parties’ own shares in a company that owns and manages a vacation home property. Your contribution towards purchasing and maintaining the vacation home determines your shares in the company.
This arrangement has several advantages and eliminates many issues associated with timeshare and fractional ownership. Now, you can find prospective investors and go through the process of forming and managing the LLC. But it can be complicated and time-consuming, so you're better off letting the experts handle it for you.
Lifestyle Asset Group brings together like-minded families to co-own a vacation home and drafts all the relevant agreements defining the terms of the co-ownership. Several companies offer these services but Lifestyle Asset Group legitimately pioneered the LLC co-ownership model and after nearly a decade of managing LLCs, they have seen it all. Their documents, management and professionalism reflect that experience.
Benefits of Vacation Real Estate Investing With the Lifestyle Asset Group Joint Ownership Program
Lifestyle Asset Group developed its vacation home co-ownership model by conducting multiple surveys and tests to understand the needs of people interested in a second home. Doing so enabled the company to develop co-ownership operating agreements and reservation rules and policies that are smart, sensible and fair. Lifestyle Asset Group delivers the following benefits:
1. Earn Profits From Rental Income and Capital Gains
This form of real estate co-ownership is deal for the investor with a low-risk appetite. The LLC shields you from personal liability in case an accident happens on the property, and the victim sues. Moreover, unlike the case with private ownership, the LLC agreement also provides a solid exit strategy if you choose to cash out.
This real estate co-ownership model lets you invest in property that would otherwise be inaccessible, allowing you to benefit from rental income when you are not using the property and capital gains when the home is sold.
2. Buy a Vacation Home Cost-effectively
This co-ownership model offers huge cost benefits because you and your partners share the burden of the costs associated with vacation home ownership. Investing in a vacation home with Lifestyle Asset Group lets you maintain a substation degree of your purchasing power because you don't need to commit as much money as you would if you bought a home using the traditional method.
3. Get Full Homeownership Rights with none of the hassles
Unlike timeshare or fractional ownership, vacation property co-ownership via an LLC gives you voting rights. Moreover, you can sell your LLC interest in the home if you need to exit early, or stay in for the LLC term and build up equity over time. Like other forms of wealth, you can bequeath to others your shares in the home. Best of all – the bills are paid and the maintenance is all handled by Lifestyle Asset Group for true hassle-free ownership.
4. The Vacation Home Is Occupied Throughout the Year
Traditionally, vacation homes are unoccupied and unattended throughout most of the year. As a result, they tend to descend into a state of disrepair. Co-ownership precludes this problem because the home is usually occupied by you, your co-owners or short-term rental tenants. So, repairs are prompt, and the home stays in good condition as co-owners share the cost of maintenance.
5. Experience a New City
Your Lifestyle Asset Group investment is the key to 100s of other vacation destinations through a membership in Elite Alliance, the leading exchange provider of fractional homes and resorts around the globe. You can skip the hassle of finding good vacation rentals elsewhere and let Lifestyle Asset Group manage occasional exchanges to ski, beach, city, golf and European vacations.
Own the Vacation Home You've Always Wanted
Owning a vacation home has always been your dream, but your savings aren't enough to pay for a down payment. The good news is that not only can you own a vacation home, but it can also be a profitable real estate investment, thanks to Lifestyle Asset Group's vacation home co-ownership via an LLC.
We bring you together with like-minded partners and take care of the formation and management of the LLC. You and your partners can enjoy the benefits of owning a vacation home and being a real estate investor. Contact Lifestyle Asset Group today, and let's get you started on the process of making your dream a reality.