Buying a Second Home

If you are looking for something to invest in, a second home may be a great option. We all know that the value of real estate never goes down, right? Since we are coming up on the 10th anniversary of the start of the Great Recession, we are reminded that the value of real estate can go down, dramatically. And second home values in vacation areas usually go down first and farthest. But, we are talking about investing here so a longer-term outlook is a factor. And long term, real estate properly located is a solid investment.

Real property ownership is considered an illiquid asset so real estate investing needs to be coupled with other reasoned commitments. Unlike stocks, bonds or bitcoins, there are no apps you can download that allow you to move in, out or around your investment. You need to have compelling reasons to invest in a second home other than a place to put your money where it can grow. Reasons like:

  • I like to vacation in the area where the home is located.
  • I wouldn’t mind eventually moving there later as my life style changes.
  • If I had a vacation home by the sea I might see my grown children more often.
  • I live in town so a home at the ocean or in the mountains would be a nice get-a-way when I need that.
  • I’m really quite handy and I’m always looking for something to do.

It has been suggested that the sweet spot for a second home purchase is when folks are in their fifties. The kids are through school, managing their college loans well enough and pretty certain not to be moving back home, the mortgage on the house is paid off, you have no desire to own a boat and the Jones’s just bought a place on the Cape.

Once you have convinced yourself with the help of a spouse and other family members that a property purchase is the right move, and your financial advisor hasn’t been able to talk you out of it, you can move to the next hurdle; how to pay for it. Banks are happy to lend on a second home. Be forewarned, they usually require higher down payments and charge higher interest rates on those loans. A home equity loan on the big house is cheaper and borrowing from yourself using a line of credit on your investment portfolio, cheaper still. Projecting an income stream from the property will work with some lenders to help make a mortgage deal.

Because we are talking investment, there needs to be fail safe mechanisms built into the ownership of a second home. After funding the purchase/mortgage, the first analysis to consider is operating expenses. Schedule what you think you will need, then add a factor. You have taxes, insurance, utilities, maintenance; everything the big house costs and a little more because you will be tending to the property remotely and concerned about security and broken water pipes. If you plan on using the place less than 14 days during the year, expenses become deductible, though property taxes and loan interest are capped under the new “Tax Cuts and Jobs Act.”

Not a bad idea to have six months of reserved cash on hand for the bad times. And even though you may be intending to use the place year-round, think about a mid-course correction and turning the property into leased housing. Know the market for rental housing in the area and be ready to lease the home under a worst-case scenario.

I’ve saved the best advice for last. Don’t even think about purchasing a second home without the help of a Resident Expert(sm). Even if you are considering a purchase by the ocean, on a lake or in the mountains, your Resident Expert(sm) has connections everywhere and can make a referral to the best real estate agents and companies across the country or around the world. Enjoy the adventure!

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