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!

Contrary Thinking

By: Victor Normand
Published: September 2014

It is said that the best time of the year to sell a house is in the spring and that’s when the buyers are out. So says conventional wisdom and conventional wisdom is both wise and self-fulfilling, usually. But, is going along with what everyone else seems to be doing always what one should do?

There is an investment school of thought called contrary investing which challenges conventional wisdom. It’s a version of “buy low, sell high” where they actually try to do just that. Contrarians begin every day by questioning conventional wisdom.They live in a world that believes that there is always a point in time when conventional wisdom reverses itself and they want to anticipate that moment and make money because they got there first.

This sound like a good investment strategy but like most things that sound too good to be true, contrary investing really involves staring into a crystal ball and understanding what you are looking at. You have to know the signs and have confidence in them before you polish up the ball for gazing.

Timing a real estate move can also benefit from a little contrarianism. We took a look at the real estate market in the Acton area for the year 2013 to see how well conventional wisdom holds up when it comes to the best time of the year to act. We used as our measure, days on market and the ratio between the original list price and the actual sale price. And we looked at sales that would have gone to contract (P&S) in either June or September and closed two months later. What we found was that for three of the towns, Acton, Harvard and Boxborough, sales originating in the spring had spent fewer days on market and had a higher sale price to original list price ratio. But for Concord, Littleton, Maynard and Stow the reverse was true (see the chart below).

blog chart
The point here is that while it is important to be aware of what everyone else is doing, having the discipline of a contrary thinker makes sense as well. A true contrarian starts out questioning everything and trying out an opposing view. You might want to keep your contrary views to yourself until you have done some homework. After all, conventional wisdom is not to be ignored but if you think you are on to something, you might want to make your move. Often those who have done very well with a real estate deal acted ahead of the crowd, whether they meant to do that or not.

The more information you have and the more critical tools you have to process that information, the better your chances of making the right real estate decision. An open mind is required, as is the willingness to consider opposing points of view. As always, having a Resident Expertsm to help you think things through is a great idea.

First Time Home Buyers – A Call to Action

By Victor Normand
Published: July 2013

The 25 to 34 year old demographic typically makes up the largest percentage of first time home buyers, but they are largely absent from the scene nationally and in our market.  Beset with student loans, challenging job circumstances and a conservative lending environment, these future homeowners are holed up at home with their parents or in rental units waiting for things to change.

The economy is improving, but not fast enough to deal with the unemployed or underemployed who might like to own their own homes.  And lenders are cautious in making loans to those who might have good jobs with good incomes and good potential for advancement, but they have education debt (which they are managing) and only a little cash for a down payment.

That’s not to say that programs aren’t out there to help.  The Governor recently announced a new initiative called the “Home Ownership Compact” to help first time buyers.  Six banks in the State of Massachusetts have signed on to this initiative, which should be rolling out very soon.. However, the major players behind almost all of the mortgages made in the country — Fannie Mae, Freddie Mac, and the FHA — are effectively on the sidelines when it comes to first time home buyers as we have described them.

Expect that to change at some point, now that interest rates have begun to rise and the refinance market has come to a near halt. The big banks seem to have more influence on the aforementioned government-backed entities than your average consumer, and soon they will look for new markets to replace their lost refinance business. For those first time buyers who have good jobs, less than perfect credit (as in paying down student loans), and little cash, some creative borrowing may be in order.

In the past we have suggested that borrowing from parents may be a good option.  Most 401(k) employer sponsored programs allow participants to borrow from their own accounts; often with very low interest which accrues to the participant.  Even IRA’s funded by a potential first time home buyer allows contributors to take penalty free distributions for the purchase of a home.  Given the low rate of return on these accounts, an interest bearing loan to a first time home borrower can be a good investment.   Get the facts to see if it’s a good option for you.

Recently, we have shown that the purchase of a condominium can be a good investment.  In fact, in our market, most condominiums priced under $175,000 are being purchased by investors, usually with cash.  Unlike recent single family home sales, which have been showing increasing price appreciation, condominium sale prices continue to decline, while rents on these units have been increasing.  On the basis of an income approach to value alone, sale prices for condominiums will eventually rise.
Every real estate deal is unique with different criteria involved depending on the condo complex.  Ratios of Owners vs. Renters come in to play along with knowing what specific type of financing might be available. Trust a “Resident Expertsm,” to apply their knowledge and expertise to insure a smooth transaction. You’ll move quickly through the potential pitfalls and learn something about the real estate market. It’s what we know that makes the difference.

A Condo May Present Income and Growth Opportunities

By: Victor Normand
Published: March 2013

About this time each year we like to see what is happening with the condominium market.  To begin with, we found that the overall number of condominiums sold and the number rented has remained relatively constant for the past several years.  In Acton, during the” post-bubble” period,(after Sept. 2008) about 25 to 35 condominiums priced at or below $175,000 have been sold each year, and t between 55 and 70 rented.

For the purpose of this article, we will be using a maximum sale price of $175,000.  This price is consistent with local affordable housing guidelines making this sale price within reach of family incomes at 80% of the median,  or about $80,000 per year in Acton.

As we have done in the past, we looked at both the home ownership and the investor perspective for our analysis.  The assumptions made for the study include:

  • The statistical period runs from March 1, 2012 to March 1, 2013.
  • All condominiums sold during that period under $175,000 were included and the average sale price used in the analysis.
  • The average rent for all condominiums rented during that same period was used.
  • Similarly, the association fees and property taxes were averaged for all condominiums used in the study.
  • The average mortgage interest rate for the past 12 months of 3.59% was used.
  • Rent levels, condo fees, and sale price are typically set to reflect the treatment of utility costs; consequently, no cost line item is included for utilities.

First Time Buyer/Investor Condominium  in Acton

                                                    First Time Buyer

     Investor (Cash Buyer)

Sale Price

 $116,559  $116,559

Down Payment @ 20%

 $23,312

Loan Amount

 $93,247

 

 

Term of Loan (years)

30

Loan Rate

3.59%

Monthly Payment

 $423

Taxes

 $205  $205

Condo Fee

 $331  $331

Monthly Costs

 $959  $536

Average Rent

 $1,143  $1,143

 Net Monthly Cash

 $184  $607

Annual Return on Cash

9.5% 6.2%

Given the challenges of financing a condominium purchase requiring government insured mortgages, we have abandoned that method and instead  are relying on conventional financing with 20% down for the home ownership analysis.

If a buyer is able to find a condo to purchase that meets or beats the metrics used in our hypothetical model, the economic returns are significant.  A home buyer who has been able to save up for the down payment can enjoy significantly lower monthly  housing costs and a greater effective return on the cash used for the down payment than any bank now pays on deposited funds.

The investor, who transfers available funds from any insured investment to the purchase of a condominium, will similarly see a very good return on their money.  Even greater returns might be realized depending on how an investor is able to fund the purchase.  A line of credit against other financial assets or a home equity loan usually comes with even lower interest rates than are used here.

Finally, all this good investment strategy comes at a time when condominium values are still depressed.  An improving housing market, the beginnings of easier credit and the lack of new inventory, all bode well for higher values in the not so distant future.

Why not start working with a Resident Expert smto find your good deal?