Personal Finance

How To Buy A Second Home

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

If you’re looking to buy a second or vacation house, now is the time to do it, says Money Magazine. Prices are at or near five-year lows across the board. From their peak, real estate values in Vail, Colorado have dropped by 30%.

Square foot prices at Pebble Beach, California, possibly the most famous golf region in the United States, have dropped 36.3% in the past five years. And in Orlando, Florida, where Disney World is located, real estate values have dropped by more than half.

Should we expect a price drop? “It’s a fool’s errand to attempt to time the bottom for both economists — and buyers and sellers,” says Stan Humphries, Zillow’s senior economist. It can be an excellent moment to jump into the housing market if you find a home you love and want to stay in for a while.

The Benefits of Owning a Second Home

There are properties available in a wide price range, whether you’re a skier who likes the mountain slopes of Colorado or Utah, a beach bum who loves Southern California and Florida, or a future retiree who wants to escape the snowy Northeast for the wide open, sunny plains of Arizona or South Texas. Whether you own a condo in Boston or a house in Hot Springs, Virginia, you are entitled to all of the privileges of home ownership.

  1. Gains Over Time
    Though the value of any asset might go up or down at any given moment, vacation homes in sought-after places with a restricted supply tend to hold or even increase in value over time. There is only so much land along the coast or on a mountain that can be developed, and a golf course can only have nineteen holes.

    The value of real estate, however, has always varied and is expected to continue to do so in the future, just like the value of stocks, bonds, and other assets. Know, then, that there is no assurance that the value of a second house will rise in the long run.
  2. Subtractions From Your Taxes
    There are plenty of folks who prefer to leave their second houses empty when they aren’t using them for their own pleasure. If you rent out your home for no more than two weeks each year, you can deduct your mortgage interest and property taxes in full. This mortgage can be treated the same manner as the mortgage on your principal property for tax purposes.
  3. Cash Flow From Rentals
    If you plan to rent out your house while also living there yourself, you may be qualified to deduct some of your living expenses. You may calculate this by tallying up the number of days that you had the rental. Interest, utilities, cleaning fees, lawn upkeep, and management costs are all deductible if you occupied the house for less than 10% of the days you rented it out or less than two weeks. Talk to a tax expert or go at IRS Publication 527 for further information on vacation rentals if you need help figuring out what deductions you may take.

    Seasonal changes and the resort’s overall popularity both affect the cost of a rental. Peak season weekly rental rates at most resorts are equivalent to or higher than the monthly mortgage payment, allowing you to break even with an annual occupancy of roughly 30%.
  4. Familiarity
    Repeated visits to the same spot might ease anxiety because of the familiarity that comes with it. Embedding oneself into the community’s social fabric, this setup gives you the leeway to be who you truly are while also providing the chance to develop meaningful relationships with other locals.
  5. Convenience
    Having a place to keep things that are only utilized in the second house makes packing and moving between the two places much easier. To make last-minute travels for a weekend of skiing without the trouble of packing or worrying if our skis would arrive on the same airline flight, my family and I kept our ski equipment and additional winter clothes at our property in Breckenridge, Colorado.
  6. Early Retirement Help
    In spite of our fondness for the locations we call “home,” we must admit that they all have their faults. The 100-degree heat of a Texas summer is unbearable, for example. Chicagoans, Philadelphians, and northern city dwellers often despise the annual battle with snow.

    Having a second home to escape to during the months we loathe at our primary property is a popular retirement ambition. Before you actually retire, you may reap the benefits of having a place to retreat and regroup by finding and purchasing a second home. This will give you time to adjust your expectations and make necessary changes if the reality of retirement turns out to be different from your expectations.
  7. A Gathering Place
    It’s human nature to associate specific locations with specific people and special events in their lives. I have fond memories of celebrating Independence Day at my cousin’s lake cottage with my vast extended family. Since my childhood, when my father and his two brothers bought a place on a big lake in western Oklahoma, we’ve been getting together there, and that tradition has continued with the arrival of my own children and grandkids. Our ever-expanding family has dispersed throughout the area and the country, but the yearly visit has helped us stay connected.

    Having a house that has been and will continue to be the setting for countless joyful family gatherings is a priceless legacy to pass down through the generations.
  8. Getting to Other Rental Properties
    The appeal of many vacation houses is that they are situated in desirable tourist destinations. As a result, homeowners in one area frequently exchange accommodations with those in another. The term “home swap” describes this type of arrangement.

    When I was a co-owner of a property in Pebble Beach, California, I did a house exchange with another co-owner where we both spent one week in each other’s homes (complete with a cook and cleaner) on a Caribbean island. While the owner of the St. Maarten house planned to take his golfing mates to the world-famous Pebble Beach courses, I had my sights set on a relaxing beach getaway with my family. The trade was beneficial for both parties.

Drawbacks of Owning a Second Home

In any case, not everyone would benefit from having a second house.

  1. Funds Required for the Initial Investment
    When purchasing a home, prospective buyers typically have greater standards than when renting. The market may respond to these expectations by charging more.
    The house may cost more than your primary residence because of its location in a desirable neighborhood with restricted housing options. The expenditures incurred by new homeowners to outfit their new house with furniture, linens, and dishes can easily exceed 25% to 33% of the purchase price.
  2. High-Interest Mortgages
    Lenders have been burnt badly in the home mortgage market in recent years and may be hesitant to provide financing for a new purchase. Buying a second home often requires a larger initial investment and a higher mortgage rate. A typical 15- to 30-year mortgage for a non-owner-occupied property needs a down payment of 20% to 30% of the transaction price, however this can vary greatly depending on the location, condition, and market value of the property (as well as the borrower’s financial and credit histories) (the higher the down payment, the easier to find a willing lender).
  3. Perform Routine Upkeep on Your House
    If you own your house outright or are a part of a homeowners’ association, you are solely responsible for keeping up with any necessary repairs. If a pipe bursts or the roof springs a leak, the bill will come directly out of your pocket. It’s possible that you’ll be the one to spot the issue, call in the repairmen, and meet them at the scene. The reality of property ownership often differs from the idealized version imagined by prospective buyers.
  4. Transportation Time
    A second house is typically positioned far from the main one, necessitating long drives or flights to visit. The length of the journey determines whether or not you may utilize the house for a weekend getaway. A house on the other side of the nation will necessitate fewer trips but lengthier stays if you intend to buy one there.
  5. Inflexibility
    If you’re shelling out a substantial sum every month for a second house, you could feel the urge to use it as your primary residence and never leave. You should, then, be certain that your experience there will be just as satisfying five or ten years from now as it is right now. Houses are not liquid assets; getting the price you desire when you sell might take months or even years.

Steps to Buying a Vacation Home

Buying a house, whether as a primary or secondary dwelling, can be a stressful and expensive endeavor. It’s not fun, but there are ways to minimize the discomfort.

  1. Identify Your Preferred Location
    Typically, resort regions provide a choice of accommodations to accommodate a variety of budgets. The greater the region you are prepared to examine, the more probable it is that you will locate an affordable house. Do you, for instance, need to reside on the coast or a certain mountain slope, or are you prepared to travel to the beach or ski lift?
  2. Determine a Price Range
    A second house should be a source of pleasure, not perpetual financial stress. Assume that your down payment, closing expenses, and furnishings will total 33% of the purchase price in order to get a pricing range. In other words, your first pricing range should be between $130,000 and $170,000 assuming you have $50,000 in cash.
  3. Consider Fractional Possession
    While the majority of vacation properties are sold through deeded transactions (the buyer receives a documented deed attesting to his ownership of a specific, recognized piece of real property), fractional real estate ownership has gained popularity during the 1990s. This allows a buyer to more precisely match his planned use of the property with its cost, or vice versa, to purchase a more costly home for the same investment.

    For instance, if an investor acquired a fractional stake for $100,000 and the ability to use the property for 30 days each year, the property’s value might reach $1.2 million (12 investors * $100,000 investment = $1.2 million). There is typically a significant difference in appearance, amenities, and amenities between $100,000 and $1,000,000 residences.

    Timeshares and fractional ownership are not the same. With fractional ownership, you own a portion of the real estate, but a timeshare just grants you the right to utilize the property. This distinction provides for the tax advantages of a fractional interest and the opportunity to profit from any price increases in the property.

    To reserve the property, fractional ownership and timeshares require coordination with other owners. You can organize a private partnership to acquire and own a piece of property if you intend to utilize the property substantially or if you do not wish to deal with an outside agency.

    My Pebble Beach home was shared with two partners, and the arrangement was ideal. We agreed with a local Realtor to oversee the maintenance of the property for a minimal monthly fee, making our holiday home a genuine escape.
  4. Engage a Local Real Estate Agent
    The advice of a local real estate agent is crucial while searching for your perfect holiday property. A competent agent can guide you through the purchasing process, assist you in securing mortgage financing, and maybe maintain the property while you are away. Even if you are acquiring a fractional interest from a real estate developer, the real estate agent may be able to negotiate a lower price for you.

Bottom Line

While his daughter will be attending college in Austin, Texas, he decided to invest in a fractional ownership share of a property at an exclusive golf club. The four-bedroom house comes with access to a spa and a golf course in a prestigious resort.

As a result of downturns in the building business and the necessity to cut personal costs generally, the seller, the owner of a construction firm, was ready to sell the stake for less than the original price eight years earlier.

What this means is that my buddy was able to acquire a portion of the house at a price lower than its actual cost to build. His new vacation house gives him somewhere to stay for three months out of the year without breaking the bank or requiring him to deal with the stress of hotels, resort fees, or pricey dining out. The moment to start looking for that perfect getaway home has arrived.

Curated posts

Someone from Bakersfield, CA just viewed Best Online Colleges for Exercise Science