Second Home?

Before you run off to invest in a log cabin retreat or beach front villa, listen to the advice of financial planners and second home owners themselves: The realities of owning a second home are often far different from our fantasies. Typical surprises include:

» “It costs more than we thought.”
» “We’re using it a lot less than we thought.”
» The area around our second home isn’t what we thought it would be.”
» “We’re having more conflicts than we anticipated.”

There has been a drop nationally in “second” home purchases, down about 2% in 2003 from 2001 figures according to The National Association of Realtors. In spite of this cooling interest, second home buyers and owners can be happy and profitable if they are realistic about what they are getting into. The following tips can help:

Many of us think we’d like to own our second home for life, but few properties ADAPT to our changing lifestyles. The quaint house by the lake might be perfectly suited for a childless couple, but it could be hazardous for toddler-aged grandchildren. Your teens might love the party atmosphere of a congested-area beach front condo, but will you? If a family member has a serious medical condition, is the prospective property near a hospital and/or adequate services?

Financial planners argue that, if you only intend to get a few years out of the place, RENTING makes more sense than BUYING.

Second homes typically come with all the costs associated with first homes, with the possible additions of boat storage, golf course, association and private road costs.

Insurance rates can be higher as well, with some insurance companies charging high-risk premiums on properties located in “exotic locations.”

Be aware of these costs and how they will impact your budget.

It goes without saying that a second home buyer will need a large amount of disposable income to cover the operating costs of two homes; in fact, The National Association of Realtors estimates the average annual income of a second home buyer is AT LEAST $85,000.

Look at your TOTAL financial picture: are your credit cards paid off?

Do you have an emergency backup fund equal to a months’ expenses?

Explore the tax advantages, but remember that write-offs are limited to TWO homes, and deductions vary depending on how long you stay in your second home every year.

Know what you want BEFORE you buy: is this a vacation home or an investment property? Financial planners will tell you to avoid the trap of becoming “emotionally invested” in your real estate.

If appreciation of rental value is your financial goal, you’ll need to select a prospective property with an excellent location and amenities with wide appeal (good schools, shopping, etc.). Remember: HOT markets can COOL, and “marginal” properties in a once-hot area lose value faster than first-rate properties.

Expect lenders to require larger down payments for investment properties, typically 1% higher than residential properties. Although a majority of buyers purchase a second home for recreational use, the number of people investing in a second home to make money is growing.

Really think about WHY you want this second home and WHAT you intend to gain from owning it.

Think about HOW you will sell your second home when the time comes; there are alternatives to simply dumping your property back into the market and taking your chances.

Because any profit you accumulate on a second home is subject to capital gains, you might consider making your second home your primary residence for two years. This way you’ll escape any tax on profits from the sale of your second property of up to $250,000 per owner.

Another angle to explore is a “1031 exchange,” where the IRS will allow you to exchange your rental property for similar real estate without owing taxes on the gains. Be sure to consult a financial planner skilled in exchanges as the IRS does not allow do-it-yourself procedures.

Owning a second home can be an important part of any family’s financial portfolio. With a clear purpose, consideration of the costs involved, and a fiscally sound way to sell the property when the time comes, second home ownership can be successful and fun.

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