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Tag: Investing in real estate

7 Things to Consider Before Investing in a Vacation Property in 2023

It’s a familiar feeling: returning from vacation and wishing you could have stayed longer. For some people, this feeling is so powerful that it leads to an investment in a vacation property. If this sounds like something you’d like to do, here are seven things to consider before investing in a vacation property.

READ: The Pros and Cons of Investing in Real Estate During a Recession

1. How you’ll use the property

Are you dreaming of a home away from home that your family can escape to whenever you have a spare moment? Or is your goal more long-term, buying a property as an investment but with hopes of retiring in your rental income-financed vacation home?

Whether you want to limit your vacation property for your exclusive use or generate rental income influences the type of property you’ll want to buy.

2. Cliched but true: location, location, location

If location is important when it comes to your primary home, it’s doubly important when investing in a vacation home. This is a critical consideration no matter how you decide to use this property.

When researching locations, prospective buyers should consider:

  • Accessibility
  • Proximity to popular attractions
  • Surrounding environment (e.g., in the middle of the mountains or close to water)

Additionally, think about the local real estate market, including property values, historical price trends and future growth prospects.

3. Local regulations and restrictions

Even prior to 2023, many cities and localities added substantial taxes and imposed regulations on short-, long- and medium-term rentals. Before purchasing a vacation property, you’ll need to make sure local restrictions allow for whatever type of use you are planning for your vacation property. 

These regulations and restrictions may also include things like: 

  • Zoning laws
  • Building codes
  • Homeowners Association (HOA) rules 

Violating these regulations can result in fines or legal action, so it is crucial to understand the limitations and requirements associated with owning a vacation property in a specific location.

READ: 4 Biggest Risks of Real Estate Investing in 2023 and How to Minimize Them

4. The actual cost of owning a second home

As with owning a primary residence, investing in a vacation property will end up costing much more than the listed sale price. From closing costs to regular maintenance, there are hidden expenses everywhere.

Pay attention to the total cost of ownership, which includes not only the actual cost of buying an investment property but also: 

  • Mortgage payments and interest
  • Property taxes
  • Insurance
  • Maintenance
  • Utilities
  • HOA fees
  • Furnishings and decorations
  • Lawn care/snow removal

Finally, you’ll also need to consider the tax implications of owning a vacation property. Although you may be able to deduct mortgage interest and property taxes, rental fees are considered income and need to be claimed when filing your taxes. This could bump up your tax bill. 

5. The timing of your purchase

There is still plenty of volatility in real estate in 2023, with interest rates softening somewhat but still north of 5%. If you’ve long been considering purchasing a vacation property, consider whether now is the best time — or if waiting one more season might be a better choice.

And when it comes to seasons, make sure you’re buying at the right time of year. Summer is typically a hot market for vacation homes, but in areas where winter sports rule, fall might work well, too. In this “shoulder season” of home buying, there tend to be fewer prospective buyers, which means it’s possible to get a great deal.

6. How often you’ll use the property

After returning from a vacation, it’s easy to get swept up in dreams of buying a property in the area. Many people have fallen prey to this feeling. After scanning online listings, they rush into buying a property — only to find that they don’t visit it enough to make it a financially responsible investment.

Before you take the leap and purchase a vacation property in 2023, consider how often you will actually visit and whether it’s worth the cost of ownership, especially if you are not planning on renting it out when you’re away.

READ: Start Investing in Real Estate — 6 Tips for Millennials

7. Who manages your rental

If you’ve committed to purchasing a vacation property and want to rent it out, think about who is going to manage locating, accommodating and cleaning up after tenants. Will you join a rental platform like VRBO or Airbnb, or will you advertise on other less popular platforms?

If you do rent your vacation home on an established third-party site, you’ll still need to clean after each tenant, manage payments and dedicate some time during tax season to make sure you’re following the law. And if you don’t have time for this? Add an experienced property manager — and extra hours for your accountant — to the budget. 

Is investing in a vacation property in 2023 right for you?

Investing in a vacation property is a complex decision that requires careful consideration. Don’t leap before you look. Take the time to plan and consider your goals, budget and intended use first. With the right planning and diligence, owning a vacation property can be a rewarding and fulfilling experience.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

LLCs and Real Estate Investing: Pros and Cons You Should Know in 2023

Whether you are new to real estate investing or a seasoned professional, chances are good you have considered forming an LLC at one time or another. This type of business structure has many different pros and cons when it comes to making money on your investment. Weighing these can help you make a more informed decision on whether this approach is right for your investment strategy.

READ: 4 Biggest Risks of Real Estate Investing in 2023 and How to Minimize Them

What’s an LLC?

A limited liability company (LLC) is a type of business organization that protects its sole proprietors or partners from any personal liability. A single person can form an LLC (sole proprietor), or multiple people can form a group of members. 

Who can form an LLC?

Anyone can form an LLC, but many states have different requirements or restrictions. It’s also important to note that not all LLCs are recognized in all states. So if you form an LLC in Maryland and are looking to buy property in California, make sure you’ll have all the same protections for yourself and your investment on the other side of the country.

Is an LLC required to invest in real estate?

Definitely not. Some people mistakenly believe that investors need to form an LLC to invest in certain kinds of real estate (e.g., wholesaling real estate or purchasing an apartment), but that’s not true. As with most kinds of investments, all you need is money to spend. 

READ: Start Investing in Real Estate — 6 Tips for Millennials

Pros of investing in real estate with an LLC

There are many reasons why investing through an LLC makes good sense. 

1. Protection from personal liability

LLCs provide a legal separation between personal and business assets. This shields members from personal liability in case of: 

  • Debts
  • Lawsuits
  • Financial obligations related to real estate investment

Investing is inherently risky, but LLCs help minimize personal financial damage.

2. Tax flexibility

An LLC allows for pass-through taxation, meaning that profits and losses flow through to the individual members and are reported on their personal tax returns. This avoids double taxation, as corporate taxes don’t apply to an LLC.

If you’re investing on a budget and trying to save money on fees and costs, an LLC can keep more money in your pocket at tax time.

3. Flexible business structure

LLCs offer flexibility in management structures, which can be beneficial for real estate investors. Members can choose to manage the company themselves or appoint a manager to handle the daily operations.

READ: 8 Questions to Ask a Potential Real Estate Investing Partner

4. Ease of ownership transfer

Transferring ownership of real estate held in an LLC can be simpler than transferring personal property. Instead of executing a complicated property deed transfer in a personal real estate transaction, an LLC simply adjusts membership interests.

An LLC is another real estate tool that makes it easier to organize, transfer and manage your investments.

5. Privacy

Depending on the state in which the LLC is formed, public records may not display the names of individual members. For some investors, this privacy is one of the main reasons an LLC makes sense.

Cons of investing in real estate with an LLC

Not everything is sunny when it comes to LLCs and real estate investing. There are a few drawbacks to consider.

1. Cost and complexity

Setting up and maintaining an LLC requires time, effort and money. Depending on your state, you may need to pay filing fees, annual fees and potentially consult with legal or tax professionals to ensure compliance with regulations.

That money you saved on lower realtor commissions or other cost-saving measures may be spent on annual fees and more complicated tax preparation. 

2. Limited liability isn’t absolute

While an LLC provides some protection against personal liability, it may not be absolute. In certain situations, such as fraud or personal guarantees on loans, members can still be held personally liable.

3. Mortgage challenges

Obtaining financing for an LLC-held property may be more difficult than for an individually-held property. Some lenders perceive the investment as higher risk. Interest rates may be higher and larger down payments may be required.

For investors looking at different strategies to purchase real estate (e.g., rent-to-own or alternative types of financing) forming an LLC may not provide any advantages. 

4. Tax implications

While pass-through taxation can be advantageous, it can also complicate personal tax returns for individual members. Each member must report the LLC’s income, deductions and credits on their personal tax returns.

5. State-specific rules and regulations

LLC regulations vary by state. The process of setting up and maintaining an LLC can be more complicated if you’re investing in properties across multiple states.

Is an LLC right for your real estate investments?

Investing in real estate through an LLC offers both benefits and drawbacks. Before making a decision, it’s essential to consider your individual financial situation, investment goals and risk tolerance. Consult with legal and tax professionals to see if it’s right for you.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.