Clearly, if you are reading this article, you love the lake life, or you are at least interested in lake culture somewhat. Visitors to my lake, Lake Texoma, ask what it is like to live here. They ask store clerks, casino, marina, and restaurant staff, campground attendants, beachfront goers, anglers, and boaters. Lakehub wants to help you move closer to buying your lake house. But we want to give you the real pros and cons.
What Are the Reasons to Buy a Lake House?
Prevailing reasons exist for buying a lake house. The reasons are subjective depending on what is important to people who want to live a satisfying lifestyle with a healthy work-life balance according to their values. We are a nation of variant lifestyles. As with any other major decision, future lake home buyers should critically consider the pros and cons of major investments, like buying a lake house.
Reasons to buy a lake house make up a long list. Lake houses typically keep their value when housing markets take a downturn, they become vacation/second homes for making memories; they bring in vacation home rental or long-term rental home income; they become retirement homes, or they are the home you have dreamed of because you love living at the lake.
Plus, there is a cornucopia of additional reasons. People love the solitude and nature surrounding most lakes. Lakes provide an environment for a sport that can only be carried out on a lake or water body, like fishing, scuba diving, boating, swimming, or watersports. Continuing psychological research studies find that living near “green” and “blue” (nature) spaces is beneficial for mental and physical health.
Pros & Cons of a Lake House as a Full time Residence
Watching the sun rise or set over a smooth-as-glass lake. Lingering days spent out on the water. Watersports and boat rides at sunset. BBQs, campfires, and roasted marshmallows. Fishing when they are biting day or night or in between. Creating lifetime memories with family and friends. Hanging out at the party cove. Pulling up for brunch at a waterfront restaurant on a lazy Sunday morning.
That’s the lake life dream! More pros comprise a life living around nature and marine life. Less traffic, more solitude, outdoor exercise opportunities, saving on vacations, lower-priced vehicle insurance, better sleep, and less stress all add up to the advantages of buying a like home. Lake houses tend to appreciate in value more than town or city homes if real estate values decrease or inflation rises.
Unfortunately, there are cons to living at the lake year-round, like any other lifestyle. Wildlife can be dangerous to small children and pets. Full-time lake residents have to be aware of what wildlife species can cause domestic problems. Rural lake life requires people to drive further for supplies and services, plus there are few or no delivery services like takeout food to your door and pharmaceutical and grocery deliveries.
If you buy a rural lake home, you will have to take more time and plan to get groceries, supplies, healthcare, and services. Year-round lake homeowners who are still working and who do not work for or own a business related to the lake like a fishing charter, etc., commute to the cities. Sometimes they commute up to four hours a day or stay in the city during work days.
Waterfront property is typically more expensive than other homes, as is property close to the waterfront. If it is a second home, financing criteria are more rigorous. If your home is in a Federal Emergency Management Agency’s (FEMA) designated flood zone of A and V, your lender requires flood insurance. FEMA is the only underwriter for flood insurance in the U.S., but many insurance agencies sell flood policies.
FEMA uses different codes to categorize the specific flood risk to a specific area. The Federal Emergency Management Agency reports that flooding is the most common natural disaster in the U.S. An inch of flooding can cause damage to your property and result in mold growth. According to Realtor Magazine, almost six million homes and commercial buildings in the U.S. are in high-risk flood zones.
FEMA gives five categories designating flood zones, A, B, C, X, and V, or moderate (B, X), low risk (C, X), high risk (A), high risk coastal areas (V), and undetermined risk areas. No home is free from the risk of flooding, but flood zones present a higher risk of flooding. The First Street Foundation created a Property-level Climate Risk Information website. For flood risk, homeowners can check their address for flood risk levels here: https://riskfactor.com/?utm_source=floodfactor.
Other risks lake homeowners need to assess are the climate of their region because a lake house typically requires extra maintenance, wind factors coming off of the lake, and the home’s position in relation to the sun. Homes close to water bodies generally experience more abrasion than those inland. Also, lake homeowners usually have more structures, like docks, more outbuildings, and carports for boats, RV’s, or vehicles.
Pros & Cons of a Lake House as a Vacation / Weekender Home
A short-term vacation home rental becomes an asset in many cases. Vacation home rental proponents and the IRS call rental income passive income, but it does not, in reality, bring passive income. You can use your lake house by blocking dates you want to spend at it, which is convenient. You can use the home for a certain amount of time in IRS terms, plus make money to offset its expenses.
When you use your vacation home for your vacations, you reduce the costs of your vacations. The IRS has limitations, which is discussed in the con section. This lifestyle is not for people who like to explore unknown places and discover new cuisines and cultures on vacations. You can personalize your décor and landscape. You can rent the house during busy “seasons” for higher fees.
When making an income from your vacation property, you can claim tax exemptions. This converts into property tax, mortgage interest, casualty losses, maintenance, utilities, insurance, and depreciation deductions, which reduces the amount of taxable rental income. A vacation homeowner could also consider the home as a retirement investment. When thinking about a vacation rental home investment, you can find and work with an experienced real estate professional who specializes in vacation homes.
Along with the cons explained above, second homeowners pay an extra mortgage, property taxes, insurance, and utilities, plus the extra maintenance fees and unexpected expenses. You cannot claim income to the IRS if you rent less than 14 days a year. These homeowners may choose to hire maintenance contractors, but if they do not live on a property, they must be extremely careful when hiring help. Due diligence is especially required to investigate who they hire.
A vacation rental home is not passive income because of the extra work you have to do to maintain it, both physically and fiscally. Vacation homeowners may do all the maintenance work themselves, hire contractors, or a property manager. They must keep excellent financial records, tax records, and calculate time-consuming costs and file taxes or hire a tax preparation expert. Either way, they are spending a good amount of time and money to keep the home in good condition. Therefore, rental income is not entirely passive.
IRS limitations may apply to the rental income expenses you can deduct. Your vacation home is considered a dwelling (residence) if you use it for personal purposes during the tax year for a number of days that is greater than 14 days total or 10% of the total days you rent it to others at a fair rental price. At that point, the IRS considers your vacation home as your second primary residence, along with your first primary residence.
For example, if you live in your primary home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year. Or you can skip this advantage.
Vacation home clients can be picky, needy, or the perfect guests. You have to decide what you want to offer in terms of amenities, like how you will handle damages, deposit fees, emergencies, and theft. Again, the IRS has limitations on how you manage these types of deductions. The ability to deduct rental losses are subject to IRS Adjusted Gross Income (AGI) limits. This is why many vacation homeowners who rent short-term limit their personal use of the property.
Diligent record keeping is the key. For example, if you go to your vacation home rental to take care of numerous maintenance chores and you stay there two weeks and you keep a record of your time spent working and the receipts for materials and supplies, then the IRS will not consider that residential use. Most people need to consult a tax professional to keep their records in accordance with IRS statutes.
Pros & Cons of a Lake House as a Rental Home
Long-term rental homes come with different regulations, pros, and cons than a short-term vacation rental home. Besides IRS statutes regarding rental income, often state, county, and city statues come into play, especially when it comes to expensive evictions. Location is also crucial at a lake, as is any other investment property. It takes a certain personality and character to deal positively with long-term home renters and risk to the home.
The main pros of owning a long-term rental are inflation hedges, rental income, equity building, and tax benefits. An investment hedge protects against the decrease of the buying power of money. The value of an asset must increase more than the rate of inflation to be considered an inflation hedge. When it comes to investing, gold and real estate are traditional inflation hedges.
If managed well, privately owned real estate serves effectively against inflation. Rental homeowners can raise rents and frequently do so during inflationary periods. Periodic rent reviews can be included in leases, which is important in long-term leases. A rent increase can shift operating and capital improvement costs to tenants.
A quality rental property can bring in extra cash flow. For example, if a single family home rents for $2,000, and the mortgage and operating costs are 80% of the rent, then the potential cash flow is $400. Rental home property owners need to view this income annually rather than monthly. We discuss this further in the con section.
Rental properties have the potential to build equity. Historically, home values increase over time, and many real estate investors hold on to rental property for five years or longer. This is because the investor may not make short-term equity depending on the economy.
The IRS tax code is kind to real estate investors. Investors can deduct operating costs like maintenance, insurance, property taxes, and property management fees from the rental income, plus depreciation of property, continuing education, and travel expenses to visit an out-of-town rental property once or twice a year. It is possible to have a net tax loss and a positive net cash flow with a long-term rental home.
It is hard to decide whether a huge down payment or dealing with tenants is the biggest con with a long-term rental property. Primary residential home down payment percentages are much less than a second home mortgage down payment. Lenders generally require 25% down on a real estate investment. Wise second home owners keep several month’s payments in reserve and a capital reserve account for major or unexpected repairs.
Due to the possibility of having to evict a tenant or unexpected emergency repairs, cash flow from rental income is unstable. Nothing is guaranteed with tenants. The highest quality screening processes cannot predict that tenants will abide by their leases and pay rent on time, take care of the property as spelled out in the lease, or stay until the lease ends. Evictions are expensive and time consuming. The eviction process depends on governmental statutes.
ROI…Like any other home, it requires maintenance and repairs to keep a rental home in habitable condition. A property will decrease in value if left to the elements that be. Rental incomes decrease if a home is not well maintained. The main reason for owning rental property is ROI, or Return on Investment. To determine ROI, the amount of investment is subtracted from the initial cost of the investment and then from its final value, then dividing this new number by the cost of the investment or ROI = Gain from investment – Cost of investment / Cost of investment.