Summer is here, and it is the season for vacation rentals. So what are the pros and cons of renting out your second home for a little cash?
Renting out a vacation home is largely worth it, thanks in part to tax benefits and assuming you have respectful renters. Property that has been financed allows you to leverage your investment in the home, which can enhance your return, but be sure to do the math if you are considering doing this as an investment versus extra cash.
For many, having rental income from a vacation home is what allows them to afford such a place. Without such income to defray costs, they could not otherwise buy such a property.
The first 14 days of annual rental income are not taxable by the U.S. Internal Revenue Service, so 100 percent can go right in the owner’s pocket. For longer term rentals, expenses such as utilities, property management fees and repairs are tax deductible. However, it is important to note if you as the owner stay in your rental home more than 14 days a year or more than 10 percent of the number of days it’s rented out, deductions cannot exceed total rental income.
Be sure to figure in costs such as background checks on renters, plans for renters who overstay their welcome or incur significant damage and personal injury liability risks – that is, if a renter gets injured on the property and sues you. There is also risk that renters may cancel at the last minute.
Because serving as a landlord can take up considerable time, when determining the rent, you need to include the value of your time and maintenance costs. Always have a plan in place for the worst case scenario – that may mean setting some money aside in case you have to make unexpected payments or repairs.
Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisers before investing.