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.
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.
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.
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.
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.