Second Home Purchase Considerations

Written by  //  August 29, 2012  //  Other Home Issues  //  Comments Off on Second Home Purchase Considerations

Your home is your castle, but wouldn’t it be nice if you had a second home to go to? In 2006, just before the real estate bubble burst, 3.34 million second home sales were recorded by the National Association of Realtors. That number has certainly declined in recent years, reflecting current market conditions. Still, a second home is within reach of many Americans, people who want a home for vacation purposes, for an investment or both.

If you’re in the market for a second home, the following considerations should be weighed first:

1. A home or a hassle. Will your second home be a help or a hindrance? It might be a hindrance if you are tethered to it, requiring you to make regular trips to the home to make sure it hasn’t been invaded by squatters or washed out to sea. It can be a help if it offers a place for you to relax with little worry about maintenance, upkeep, finding a tenant or sharing it with family members.

You may prefer a house at the beach, but if you’re responsible for getting it ready for summer, preparing it for winter, renting it out or maintaining the property, it may not suit you. Instead, a condominium might prove best, a place where you turn over much of the maintenance responsibilities to the association in exchange for a monthly fee. Buy the place that you want and can afford, but fully understand the responsibilities that come with it.

2. A financial boon or a bane. There are a lot of bargains on the housing market right now including at key vacation spots at the ocean, the lake or by a golf course. Buying a second home can be a good financial move or it could be a disaster. 

With any home purchase, you need to be fully aware of the expenses that a second home will incur. Those expenses include what you paid for the home, closing costs, property taxes and association fees. They also include homeowners and hazard insurance, property management fees and your utilities. You might imagine making a killing by renting your property out, but don’t rely on rental income exclusively to make your purchase a go.

3. A tax haven or a headache. Own a second home and you’ll be required to pay property taxes, pegged at a rate that might stun you. Don’t look for an abatement just because you live in your home for three months out of the year — most resort communities hold absentee owners to the same tax standard as local residents. The community’s fire, police and emergency departments still need to be supported whether you’re there year ’round or not.

There can also be an important income tax implication if you buy your second home and rent it out. Your tax consultant can advise you on the number of days you can stay there and how best to treat rental income. Real estate taxes should be deductible for your second home, but the IRS will not allow you to deduct taxes charged for "local benefits and improvements that increase the value of the property…" That means the new sidewalks put in front of your summer home are an expense you will have to eat.

4. A financing advantage or a problem. Generally, if you have excellent credit, you should have no trouble financing a second home. Coming up with the cash for a sizable down payment can be your biggest challenge. That money can come from a variety of sources, some that many have tax advantages or others that may cause you a problem.

If you borrow equity from your primary home, then the equity on your first home along with the mortgage on both homes should be tax deductible. If you borrow money from your company’s 401(k) plan, you will usually have to qualify for a hardship withdrawal. If you get approved for a loan and later leave your job, you’ll be required to pay back your loan or incur taxes on the loan plus a 10 percent penalty if you’re under age 59 1/2.

5. An investment or a money pit. Like any home purchase, you’ll want to know exactly what you’re getting into when buying a second home. That condominium overlooking the harbor may be just 20 years old, but it could be ready for a major renovation. Sea salt has eaten into the main beams and the roof has been patched up annually following each hurricane season. The parking garage leaks, the septic system needs to be updated and then there is the matter of windows that no longer seem to keep the wind out.

Beyond the monthly expenses and upkeep, the annual updates and other expenses is the long term value of the home itself. A once bright vacation spot may no longer hold the value it once held. Newer communities may have risen that offer a far better investment option for you. If the investment is not of importance to you, then the community may still suit you fine. 

Considerations

Buyers of second homes should receive estimates of homeowners and hazard insurance before making a purchase. Homes at risk to damage by flooding, theft, fire or windstorms will incur a higher insurance rate. You’ll also need to buy liability insurance to protect you, members of your family and visitors to your property including tenants.

Tricia Thomas is a professional blogger that writes for LuxuryHomeHunt.com, a leading Florida real estate website featuring Alaqua Lakes Homes for Sale.

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