Is that year end bonus burning a hole in your pocket?Â Thinking of a way to spend your tax refund or did your accountant tell you that you must invest in something because you made too much money? When considering how to invest your money, you may be considering upgrades to your current home, whether it be finishing your basement, adding square footage to your home, or updating your kitchen or bath.Â When considering the options you need to be wary toÂ not over improve a home, so use some discretion.Â Alternatively, have you considered taking those same dollars and putting them down on another property?
You wouldn't be alone if you were considering purchasing that vacation home. Sales of second homes increased 10 percent between 2011 and 2012, according to the National Association of Realtors
. During this vacation-home buying boom, the median price for these properties went through the roof â€“ up 23 percent, to $150,000.
Does aÂ Second Home Makes Financial Sense
Resist the urge to impulse buy, you may end up with a second home you cannot afford or that does notÂ fit your needs.
Whether or not you consider yourself an investor, you'll want your second home purchase to be a sound financial decision. Consider all the costs, not just the purchase price, but ongoing routine expenses as well as unforeseen expenses. You'll want to tally up your likely expenses and build up your cash reserve. For home maintenance, a good rule of thumb is to set aside 2 percent of the homeâ€™s value per year for upkeep and repairs.Â If you plan on renting out the property, determine how much you can expect from rental income (it's often not enough to cover your monthly costs).
A few questions to ask yourself:
Do you plan to vacation in the same place year after year? Does it match your lifestyle?
Do you plan to hold onto the property for at least 5 years?
Is the real estate market now favorable to buyers?
Are you certain that youâ€™ll be able to afford the extra expenses over theÂ long term?
If you answer yes to these, it probably is a good choice for you. However if youâ€™re not sure how long youâ€™ll enjoy that location or if youâ€™re unsure of your future income, it is best not to commit yourself just yet.
Location:Â Where & What Type of HomeÂ to Buy
More than 80 percent of second-home ownersÂ purchase their home within driving proximity to their primary residence, according to the National Association of RealtorsÂ (NAR). What distance do you feel comfortable with?Â Â The average buyer purchases a vacation home within 375 miles of his or her primary residence, with 31 percent buying within 100 miles. Get out a map and draw 100 mile and 400 mile circles to help pinpoint the areas where you should be looking. Then identify the areas that best suit your needs. You'll need to rely on both market research and your own personal preferences - be realistic about what type of second home fits your lifestyle, focusing on quality-of-life amenities as you envision what a second home could mean for your family. With 34 percent of vacation-home buyers eventually using the property as a primary residence, make sure itâ€™s somewhere you can see yourself spending a significant amount of time. Don't go it alone - team up with a Realtor to look into factors such asÂ the strength of the local economy, trends in resale values, conveniences and amenities, property taxes, quality of local schools and medical care, as well as others. Visit the area that you're interested in during all four seasons of the year in order to get a complete picture. A well placed home will aid in the ease of renting and ensure long term enjoyment.
Once you've zeroed in on where you want to be, you need to decide on the type of home that would best suit your needs. The costs and demands of owning a single-family home are different from those of owning a condominium, townhouse, or co-op. Buyers who only plan on visiting their homes occasionally may be better suited to condos, townhouses,Â or co-ops as they typically require less outdoor maintenance,Â as these areas will beÂ governed and maintained by a community association. If your idea of solaceÂ includesÂ privacy, stick with a single-family home.
A note on renting; even if youÂ have noÂ plansÂ to rent your vacation home, it is a good idea to weigh out the home's 'rental potential'. Renters want access to amenities, places for a group of people to sleep, and being in the thick of things. Homes that can be rented are more valuable and can offer you more options should your plans change in the future.
Second-home owners need to worry about both property taxes (which vary by state and locality) and, if renting out theÂ home for more than 14 days per year, income tax.Â ResearchingÂ the taxes duringÂ the house-hunting process can save you thousands of dollars a year by purchasing a homeÂ in a favorable tax situation.Â Â If you're renting out a vacation property, the amount of days you yourself spend there can make a difference in how much you'll owe in income tax or theÂ potential benefits you can reap such as deductions for property management and rental expenses.
Most people pay for their home with 'traditional financing', Â a combination of a down payment and a loan for the remaining amount. The higher your down payment, you shouldÂ aim for 20%,Â the lower the loan, and the more house you can therefore afford.
Most buyers will also need toÂ secureÂ a loanÂ to help with the rest of the financing. Your Realtor can provide you with some references - those whom they've had a good experience and have had aÂ successful track record.Â Â Review the various mortgage options and sample payment schedules andÂ compare them toÂ your own short- and long-term goals, to find a mortgage that best fits your needs.
Alternatively, some buyers wish to forgo the traditional mortgage route and instead opt to borrow directlyÂ from parents, siblings, or close friends. This optionÂ saves you tens of thousands of dollars in interest over the life of your mortgage and keeps theÂ property within your circle, rather than handing it over to a bank.
Another money-saving approach is to partner with another purchaser, a growing trend known as 'shared ownership'. You'll want to start by determining whether co-ownership with a particular person is likely to work.Â If so,Â draft a written agreement to spell out how ongoing costs will be split and deal with other potential sources of contention, such as what happens if one of you wants out after a few years or how to deal with improvements or maintenance over the long term.
Protect Your Investment
From the beginning, prior to purchasing,Â you'll want to get a proper home inspection, so as to deal with some repair issues up front, and get a sense of what other repairs may be looming.
Your lenderÂ typically requires you to purchase title insurance in case problems such as past ownership or debt claims on the property surface after the purchase. I would suggest this in all cases as you do not want a past lien to now be your responsibility!
Your lenderÂ is likely to alsoÂ require that you carry hazard insurance, protect your property against damage from theft, fire, flooding, etc. The cost of insurance for second homes can be higher than your primary residence. You will probably want to add liability insurance, covering you and members of your household for accidental injuries to your visitors. Consider buying a home warranty as if you are renting your home, others may not treat it the same as you would or major items like your HVAC system, plumbing, electrical and more may need repair. In allÂ cases, protect your investment as you would your primary home.
Please feel free to contact me for assistance in purchasing a 2nd, or 3rdÂ home even a primary residence in the greater Philadelphia area.Â I have the reources for helping you to find the best Realtor and financing nationally and internationally as well. My services to assist you are free!
Frank DolskiÂ Â MBA, ABR, e-PRO
Certified Relocation Specialist
Previews Luxury Home Specialist
Coldwell Banker Hearthside Realtors
Ranked #1 In The State of PA in 2012 For Affiliated Coldwell Banker International Realtors
2012 Coldwell Banker International Presidentâ€™s Elite Award
2010-2011 Coldwell Banker International Presidentâ€™s Circle Award