Mortgage 101: Partner up and invest in a vacation home

Shawnee Mission Post Sponsor - October 18, 2016 10:00 am

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Mike Miles
Mike Miles

Ever been to a place on a vacation and thought to yourself that it would be great to live there? I think we all have, right?

Whether it be in the mountains, at a resort or on a beach, vacations usually allow us to see the best a place has to offer. Normally what follows after answering the first question is that common sense quickly sinks back in. Logic tells us it would be too expensive. Obviously there are other obstacles, such as children, school and work.

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However, I believe most people don’t spend much time discussing any other obstacle than money. What if the money obstacle was greatly reduced? What if you could partner up with one or more family members or friends to buy a place and then hire a management company to rent it out to others?

First, let’s talk about what makes a home a vacation home. First it has to be at least 50 miles away from your primary residence. Secondly it has to be in an area that can be justified as a vacation destination.

Second, let’s discuss financing. Conventional loans are priced out the same for vacation/second homes as primary homes with the only exception being a down payment requirement of at least 10 percent.

Now let’s talk about the idea. Partner up with a trusted person you are close with and who you like (I’ll explain in a bit). Agree to split all purchase and operating costs equally. Buy a property where you love to vacation and also where others love to vacation. Hire a management company to lease it while you are gone. Let’s look at an example and use a price of $400,000 as the price of the home.

Expenses:

  • 10 percent down payment with each partner paying ½ is $20,000 each
  • The total payment of financing $360,000 over a 30-year period would be around $2,200 per month with each partner paying half, or $1,100 per month
  • Monthly operating costs (utilities and management) estimated at $400 with each partner paying half, or $200 a month

At this point of the example each partner has $1,300 a month in ownership and operating expenses. That’s $15,600 a year which can sound like a lot. However, what if you rented the property to vacationers at a rate of $250 per night? Your total annual expense would be covered in 63 days. It’s safe to assume the management company would take a percentage of rents received, but you still get the idea that in about 60 days you could have 100 percent of your cost covered.

Next, think about the idea of not only covering expenses but earning net income. There are tax deductions available and equity appreciation to add to the benefits of owning a vacation/secondary residence. Additionally, you own it so you can pick and choose when you want to go on vacation without worrying about seasonal rates and/or vacancy.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268

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