Money question re: 2nd house

[ohgillian]

PDQ numbers.

We are considering buying a second home in an area with a lot of short-term rentals that would need some improvements, so we might buy a house we're happy with as-is or a house that we're wanting to sink a lot of money in for renovations.

We think that the max we want to "spend" is $500,000 -- I say "spend" b/c I mean that I'd be financially comfortable with a purchase price of $500k, or a purchase price of $300k that needs $200k of renovations. (Whether i want the hassle of renovations is a separate question.)

We have about $300k in a taxable account that I could use for this. But I don't know how much I would want to put down and more on my mind, how I want to fund the ongoing costs of the house, etc. We could make some changes to current spending to cover the operating costs. Should I do that? If not, how would I cover ongoing expenses out of this account? How do I think about all this? What should I be considering specific to the finances of down payment and operating costs and potential renovation costs? I know one questions is for me to look at my basis and see how much we could actually get out of that account net of taxes. 

I don't know exactly what I'm asking but feel free to just free associate, lol.

[ny96]

If it were me I think I’d be comfortable taking out 50% of that taxable money (assuming you don’t have any other specific plan for that money) and then planning to pay for any expenses and mortgage payments through income alone.

[puppylove64]

If you are not planning to live in this home, you will have to put 20% down for the mortgage. Are you planning to rent it for income? If there will be no income coming in, I would plan you change your budget to cash flow expenses, and avoid pulling from savings. If there will be income, I would be more comfortable putting 20-50k in an account to use for upfront costs with the hope to replenish as income starts flowing

[imojoebunny]

We bought a second home that was a foreclosure and needed work. It is hard to tell from the limited info you have given, exactly what would be best regarding financing, but for us, We paid cash for the house, repairs, and renovations to give us flexibility. We have had it for 8 years, and have not needed or wanted to rent it out, but if we do so in the future, we will take out a mortgage for tax reasons to offset the income. In the meantime, the carry cost is around $600-$800 a month all in, including utilities, taxes, and maintenance, about what renting a place in that location would cost for a weekend. For now, we use it often enough that this works for us. Don't forget about hidden expenses. It was at least $10K to furnish our place simply, get 8 new mattresses, beds, sofas, TVs, bedding, kitchen, ect, it all adds up. To furnish it as a rental would have been at least 2X that and we would have had to add a hot tub (standard item there), which would be at least another $5K, and these expenses . We also have fairly high exterior maintenance cost because it is a log style, though not true log exterior, and has to be resealed every 4-5 years, which cost around $7K, but our taxes and HOA fees are low, $2800 a year. I don't know a lot of people who actually make money on vacation rentals on a cash flow basis, especially in the first 10 years, unless they do all the booking, cleaning, and management themselves, which is a job, or they got a particularly good deal in the first place, so while rental income will offset your expenses, I wouldn't plan for it to fully cover them by a long shot. We like having our place, it is close, and we can go up for 1 night pretty often, without having to plan in advance. I hope you find something that you will use and enjoy. If you just want an investment property, I would look at a regular house in your city that you can rent to a long term tenant. It is a more stable investment, and much easier to manage than a vacation rental, and the returns after expenses would likely be greater.

[ohgillian]

Thanks for the replies since I know my OP was vague and convoluted. Your comments and questions have helped me frame my thinking a bit.

- We are not planning to live in the home full time, so that's good to know about the 20%. I think we'd want to put a minimum of 20% down anyway to avoid PMI.

- DH has done some research (quite a bit actually) about renting it via a property management company and/or on his own. I'm loathe to do that, but it's an option. To be honest, if he wants to run a short-term rental, I'd rather him do it separately than a home that we care about. But we are looking into that. He has worked up a detailed financial model about the costs and as imojoebunny said, you don't break even. Which is fine, but, I don't know.

- Realistically, we don't have enough money to buy it outright. I think I could come up with like $330k maybe that's outside of retirement vehicles, max, but I doubt we want to dedicate that much liquid assets to this.

- What puppylove64 said feels right to me - I'm uncomfortable with covering ongoing expenses thru anything but our income. Because what's the end game there? H and I talked again this morning about evaluating whether we can pay for operating costs out of our cash flow, which partly brings me back to the question of how much to put down.

So, lots to think about. Thanks for the replies thus far.

[ssmjlm]

I can't help much on the finances side. Our vacation home was purchased in cash, so no mortgage. The "operating" funds are in a separate account to keep track of year to year costs of things. The funds are part of income, but it's kept in that account.

One thing I will caution, if you buy somewhere that needs work, have a very upfront discussion with your realtor about how long it takes contractors to do work. And same with any contractors to talk to. Not one person we know has had luck with contractors being reliable and timely in our beach town. And no amount of staying on top of them will help. Everything takes longer which means you can't have renters in.

Also, I would discuss what type of costs for lifecycle of items and replacements. Renters can be BRUTAL. We've heard all the stories, furniture rearranging, pets showing up w/o permission, rugs destroyed, etc. So replacing furniture, appliances like toasters, etc is another cost to estimate.

[ohgillian]

Aug 23, 2021 7:54:06 GMT -5 ssmjlm said:

I can't help much on the finances side. Our vacation home was purchased in cash, so no mortgage. The "operating" funds are in a separate account to keep track of year to year costs of things. The funds are part of income, but it's kept in that account.

One thing I will caution, if you buy somewhere that needs work, have a very upfront discussion with your realtor about how long it takes contractors to do work. And same with any contractors to talk to. Not one person we know has had luck with contractors being reliable and timely in our beach town. And no amount of staying on top of them will help. Everything takes longer which means you can't have renters in.

Also, I would discuss what type of costs for lifecycle of items and replacements. Renters can be BRUTAL. We've heard all the stories, furniture rearranging, pets showing up w/o permission, rugs destroyed, etc. So replacing furniture, appliances like toasters, etc is another cost to estimate.

Thanks for this. I joined a FB group for Air BNB and VRBO hosts, and this is absolutely my take away. The stories are horrific, which is what has really made me not want to rent out. 

[ssmjlm]

ohgillian, the other thing I just thought of that we were laughing about is, where we are, renters love to leave every outdoor light on 24/7. And many of these houses have the big double floodlights. My dad was cringing about the electric bill each month.

[Cappy]

I'm looking into something similar (long term college town rental vs short term vacay) and here are the general #s I've seen from the blog I follow. These are the same I used when helping to manage my mom's 3 rentals so they've checked out in our experiences.:

1% rule -- monthly rent should be at least 1% of the all-in price. So for a 500k price you would be looking to acquire a property that can gross $5000/month
Generic calculation is 50% of rent = income/profit and 50% you escrow for expenses (taxes, insurance, HOA, cap ex., vacancy rate, property manager fees, lawn care, etc.). We use a high interest savings account with sub accounts.

With those quick numbers I can usually assess if a property will be a good deal or a dud in Excel.

If you are doing a short term rental you'd also need to calculate in utilities, cleaning, and consumables (TP/soaps) so that may impact the figures above.
Our property manager is 10% of rent but for short term I'd assume it's more like 25% or more.
Short term rental vacancy is probably higher than long. I think our vacancy on the long term is 16%
Property taxes are higher for non-owner occupied. In our state it's 2% of assessed (Vs. 1%) but this will obviously vary.


RE: the loan, our broker told us we'd need 25% down for an income property loan but the rates are still market. There's also a funding fee of 1%. I think most lenders just charge a higher rate.


Afford Anything / Paula Pant has been an amazing source of info. for me. And this post is a great recount of her AirBNB experience: affordanything.com/the-airbnb-experiment-how-much-did-i-make/