Owning a second home is often far different from the fantasies that many potential buyers dream of. Second home owners have said that it cost more than they imaged. They use it less than they planned. Or the area isn’t what they thought it would be.
Nationally, the interest in second homes may be cooling. Only 4% of all homes purchased in the first quarter of 2003 were second homes, according to the National Association of Realtors, down from 5.5% of all purchases in 2001.
Should you forgo that cabin in the woods or the condo on the beach? No. The happiest second-home owners are those who are realistic about what they’re getting into. Here are some tips to help you in your decision to purchase a second home.
What type of person are you?
Are you the kind of person who loves to visit new places or who loves to visit hotels that cater to every need? How are you going to feel about having to go to the same place over and over again, or having to face a big pile of laundry and dirty dishes at the end of every stay?
Think your decisions all the way through
Many second-home buyers expect to own their properties for the rest of their lives, but often few vacation properties are that flexible. The lakeside retreat that’s perfect for a childless couple might be too small or hazardous for toddlers or too isolated and boring for teenagers. Similarly, your teenagers might revel in a hopping beachfront location that will be way too congested and noisy once you’re retired. In fact, the very attributes that draw you to a place may turn out to be its biggest disadvantages. Second home owner Eddie O’Connor of Whitehall, Michigan said he is looking to rent out the family cabin on White Lake because their teenage children are no longer interested in leaving their friends and during the summer and spend the summer months at their lake home 3 hours away.
Consider all the costs
Second homes typically come with all the expenses associated with first homes, plus a few. In addition to mortgage, taxes, maintenance, repairs and utility bills, you may face extra fees for boat storage, golf course use or upkeep of private roads, snow removal and landscaping.
Then there’s insurance. Insurers often balk at covering remote properties or those on beaches where hurricanes are a concern. You may wind up getting fire or windstorm protection from a high-risk pool, which means limited coverage and expensive premiums.
Make sure your other bases are covered before you start shopping. Are your credit cards paid off? Do you have an emergency fund equal to six months’ expenses? (Remember, you’ll need more cash to deal with maintenance and repairs on another property.) Are you contributing enough to your retirement accounts and your children’s college funds?
Factor in the tax breaks
Mortgage interest and property taxes on second homes are typically deductible. The write-offs are limited to two homes, however. Own any more, and Uncle Sam won’t help you pay for them. Another potential tax break: You don’t have to pay taxes on any rental income on a home if it’s rented for less than 15 days. Of course, you won’t be able to deduct rental expenses, either. If you rent your home for 15 days or more, you’ll have to declare the income, but you can deduct things like cleaning, maintenance, repairs, utilities and rental agent fees.
Buy investment property with a clear head
Most people — 78% by NAR’s count — buy second homes primarily for recreational use. But a growing number of buyers say they’re also or primarily buying for investment purposes: 37% last year, compared with 20% in 1999. If appreciation or rental value is your goal, you’ll need to pick property in excellent locations that have amenities with wide appeal, Levin cautioned. After all, red-hot markets can suddenly cool, and marginal properties can lose value quicker than their first-rate competition. Expect lenders to demand larger down payments for investment property and to charge higher interest rates — typically about 1 percentage point higher than they would charge on a residential mortgage.
Make sure you’ve thought of a selling strategy
Selling your second home is subject to capital gains taxes so you need to consider some alternatives before you sell your second home. The current federal maximum is 15%, plus whatever your state charges. If your potential profit is large and moving is feasible, you might consider making your second home your primary residence for two years. That way you’ll escape any tax on profits of up to $250,000 per owner. If that won’t work and you’re interested in another property, you could consider what’s called a 1031 exchange. These exchanges, named after the IRS code that allows them, give owners of commercial or rental property the chance to swap for other, similar real estate without owing taxes on the gains. You would need to rent out your second home for several months before selling, and then use the proceeds to buy another rental property, which you could eventually convert to personal use.
Buying a seond home by the lake, on the beach or in the mountains can be a rewarding way for your family to enjoy vacation time. Consider these tips before purchasing your second home.