Primer for orthopedic surgeons: Economic ramifications of owning a vacation home
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Work hard, play hard. The motto of orthopedic surgery has never been truer in the literal sense. Orthopedic surgeons, young and old, enjoy time off and vacationing as much as physicians in any other medical specialty.
Whether it is a ski home, a beach home, or simply a quiet getaway with a view, wouldn’t it be nice if the economics of vacationing with family and friends also had a financial benefit? As hard as it may be to believe, owning a second home, when done strategically, can realize a financial benefit to your bottom line — all while providing a tremendous vacation asset for you and your family to enjoy. The vacation home could become a retirement home for surgeons in their later years. In this month’s column, we examine the pros and cons of owning a second home and offer strategies for orthopedic surgeons, including millennial surgeons, to consider for optimal financial benefit of a vacation asset.
Advantages
Leveraged appreciation
There are financial benefits and disadvantages to owning a vacation home. Like any real estate asset, vacation homes, whether condos or stand-alone properties, allow you to benefit from leveraged appreciation due to mortgage financing. Typically, a 20% down payment cash investment, which is common for second homes, allows you to accrue all additional equity your property gains in appreciation. On the flip side, however, leveraged depreciation also occurs if your second home is losing value.
Tax deduction
Owning a second home also affords the opportunity of earning rental income with the ability to write off certain expenses. If you rent the home out for more than 14 days per year, your property is considered a business for tax purposes and you must report the rental income on your tax return. If you use the vacation home personally for more than 14 days or more than 10% of the number of days it is rented, you can deduct rental expenses up to the amount of income but cannot deduct losses, including hosting fees, cleaning fees, repairs, property taxes, mortgage interest and property management fees. If your personal use is limited to 14 days or 10% of the time the home is rented, expenses are deductible. The rental property could even create a passive loss.
Your own getaway spot
A big advantage of owning a vacation property is the flexibility to use it as often and as long as you like. Buying a vacation home in an area you or your family frequent regularly allows you to avoid paying expensive lodging fees during repeated travel. Such flexibility allows you to potentially use your second home as a future retirement property.
Disadvantages
Property management
Unlike financial securities, a real estate asset requires continual management and maintenance. A vacation home is probably one of the most hands-on investments you can make due to the year-round time commitment. Professional property management services are helpful in easing the burden of turnover tasks, repairs, maintenance and other hassles, but often come at a high cost. Short-term property management services often charge 15% to 40% of all rental income. Some properties, like condos, require less time commitment and property management can be built-in through the condo association. However, this too often comes at a high expense.
Must market property to have traffic
Getting renters to come to your property, particularly the right type of vacationers who will take care of your treasured asset, is no easy task. A good marketing strategy would include listing your home on all the top vacation home rental platforms, optimizing your listing with appealing photos, having pricing to attract your target audience and, most importantly, staying abreast of pricing trends in the vacation area so you remain competitive.
Lenders charge more for financing
It is no secret that lenders often charge a higher rate of interest and offer a lower loan-to-value to those purchasing vacation homes vs. first-time home buyers. Therefore, expect to pay a premium mortgage rate and be prepared to make up to a 25% down payment on your property.
Location, location, location
Understanding the pros and cons of vacation asset investing is paramount to sound decision-making. If you choose a property in a location you and your family will use often each year, it will more likely justify the time commitment to cultivate your second home. Location is also critical for determining the appreciation potential of your property. If your target location has natural barriers or zoning restrictions that limit residential real estate development, your property is more likely to appreciate if the area remains popular for tourists.
Buffet’s acquisition cost principles
Ensure the price for which you acquire the property is financially sound with your pro forma models including maintenance, taxes and financing costs. As Warren Buffet said, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Top vacation rental properties, like companies, may be highly priced, but may be a better investment than a cheap property in an undesirable location.
Despite being in a completely different track, orthopedic surgeons from residents to seasoned physicians can benefit significantly from real estate investing, particularly in geographic areas they and their families may frequent. Be sure to do plenty of homework, modeling out the financial aspects of owning a second home to see if this makes sense for your situation.
- Reference:
- Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting OT21 to 844-418-1212 or at www.ojmbookstore.com. Use code OT21 at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be reached at email: sanjeevbhatia1@gmail.com.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at mandell@ojmgroup.com or 877-656-4362.
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The pros and cons of investing in vacation rental properties. www.millionacres.com/real-estate-investing/rental-properties/pros-and-cons-investing-vacation-rental-properties/.
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