Using a Second Home as a Reliable Source of Passive Income
In 2021, there were over 1.3 million vacation rental homes across the US. On average, these properties (depending on region) earned around $41,000 in annual rental revenue for the owner. That is beyond the tax advantages, asset enhancement, and freedom of mobility owning more real estate can bring to a household.
Even in today’s market, where it seems like big corporations are swiping up properties left and right, purchasing a second home is a reliable and lucrative passive income source. You can streamline the entire operation with some help from a property management company and a knowledgeable bookkeeper.
Let’s dig into how using this asset to generate wealth remains one of the most potent ways to build long-term financial security.
Real Estate as Passive Income
Most financial gurus will tell you to invest in stocks or ETFs. These provide long-term results and can generate higher returns but do not have the same flexibility in asset control. Put another way, there will always be demand for housing in the United States. After all, that is why our tax code is written to benefit those creating businesses and housing the most.
Unlike active income, which is tied to the number of hours you have in a day, passive income from real estate makes money while you sleep. You set the income-to-expense ratio and then slap a price tag on your monthly, weekly, or daily rental to earn a profit.
Benefits of a Second Home Investment
Having a second home as an investment property offers a wealth of perks to the homeowner. This is a cash-generating asset that provides:
- Capital Appreciation: In most situations, real estate will appreciate in value over time. This is a long-term view of the asset, but it is more likely to remain stable than other riskier vehicles.
- Rental Income: Over 35% of all US households rely on rental properties. That doesn’t include the over 60 million people who stayed in the US short-term vacation properties like Airbnb, Vrbo, Booking.com, and similar platforms.
- Tax Benefits: Depending on the region of the US in which you operate, you can experience significant tax deductions and benefits from a second home. That is especially the case if you are using this investment property as a part-time business.
- Portfolio Diversity: Remember the saying: “Don’t put all your eggs in one basket?” That applies to wealth building just as much as grocery shopping. You want a mix of short and long-term plus low and high-risk assets. Adding a second home offers a low-risk, long-term passive income source.
- Freedom: With the right team and systems in place, you can operate a vacation rental from anywhere on the globe. This could be your answer to traveling and having a reliable passive income that replaces a full-time job.
This is why we mentioned the bookkeeper earlier. Having a second home does come with some attention to detail, and you may want a more experienced eye to manage. The potential write-offs are varied and many – all of which depend on your local regulations and codes.
How to Select the Ideal Passive Income Property
Remember, your goal is to find a passive income source, not just a vacation property to which you and the kids can escape on the holidays. Here are some of the things people are looking for in a short-term vacation rental:
- Location: Beachfront, lake access or locations near major events and amenities like a theme park or concert venue bring in the highest revenue. The opposite side of that coin is equally important – those in remote areas where city dwellers can get a break from noise and pollution.
- Property Type: This will depend on your region, but in general, a free-standing home is more valuable than an apartment you rent. That is because potential renters want to find pools, game rooms, parking, Wi-Fi, and other amenities typically not available (in private) in an apartment setting.
- Financials: Always take a close look at the cost/benefit analysis of the property you’re considering. Using a resource like AirDNA will give you a better idea of your potential passive income. Then, you need to run the numbers of expenses, mortgage, taxes, and general upkeep items like toilet paper.
- Ease of Maintenance: A rental property will require maintenance issues. Will you be handling those issues yourself, or will you be hiring out a team? Is there anyone near your potential second home that can offer those services?
Finally, you want an investment property that is clean and updated. While there are always outliers, the most crucial aspect of a rental property will be how clean and maintained it is for a family to come for a visit.
While having a reliable passive income source from a second home is a fantastic idea for any investor, there is one more aspect you may want to consider. Owning a second home means you have a place to take a vacation whenever you want.
With modern automated apps and AI-backed workflows, it takes little to no effort to set up a calendar that blocks off time you and your family want to get away for a little bit. Need a quick Valentine’s Day present? Deck out your vacation home with roses, wine, food, and candles for you and your partner. Need a place for a graduation party? Your vacation home is happily waiting to host all the teenagers in the grade
If you still need convincing, look at this statistic. In 2022, Airbnb made over $8.4 billion in revenue, according to the SEC. That is primarily from fees collected from rental properties. As you consider how you will build future wealth, prepare for retirement, and maintain cash flow, owning a second home to generate reliable passive income has been and will most likely always be a staple of intelligent investing.