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As when you bought your permanent residence, you must evaluate your situation and crunch the numbers to see if it’s the right time for you to buy.  Just because you’ve always wanted a condo in Wrightsville Beach, it doesn’t mean it makes sense for you to buy now.  But then again…it may!

One third of the homes sold in 2010 were a vacation home or investment property. This shows that demand for second homes remains healthy even in the slow housing market.   The reasons for purchasing a second home will vary from vacation enjoyment to investment and even as a part of a retirement portfolio.

With homebuyers in an advantage position in many markets, with interest rates at record lows, it may very well be the time to make that second home purchase. Whether your reason is vacationing in paradise or for profit, find the answers to these five questions to make a smart investment:

• Step 1: Is it the right time to buy?
• Step 2: What do I look for in a second home?
• Step 3: What financing options do I have?
• Step 4: What are the tax advantages or disadvantages?
• Step 5: What alternative ownership options are available?

Step 1:    Is it the right time to buy?

Before leaping into a purchase, think through your plans for owning a second property.

Assess your goals. It may be a combination of reasons; for investment, for a vacation destination, or for both.  Do you want a place within driving distance of your current home? What vacation spots would you consider for a purchase? Maybe you want a jump on a retirement home?

• Consider local market conditions, your personal financial situation and the affordability of the area in which you wish to purchase.   Given the downturn in housing prices in many parts of the U.S., there are great deals to be had in the second home market.  Using the right real estate agent and doing your homework can result in a great buy that will meet your needs and goals. Market conditions are projected to recover slowly, so don’t plan to sell the property within the next couple of years.
• Focus on areas with steady appreciation rates. You cannot depend on renting out the property to have all your expenses covered.   However, in some markets, rentals are very strong and you should discuss this option with your real estate professional.  A rental could be a means of assisting with the financial aspects of a second home.   Do look at the purchase as an investment and consider areas where homes are more likely to appreciate.

Step 2:   What do I look for in a second home?

Once you have established your goals, it comes down to researching and finding the right property in the right location.

• Be sure to try it out first.
  When considering location, particularly in an area you’re not familiar with, renting for at least one stay is recommended. Make certain it is an area you will enjoy visiting time and time again.  Consider travel time and expenses as well as how often you plan to use the home.  With the cost of travel today, this is a consideration you should not take lightly.
• Talking to the locals can be invaluable.
  Even though you may have been vacationing in the same area for years, getting a local perspective on home ownership in the area is important before you purchase. Talk to residents. Find out what they like about where they live, how has it changed over the years, what types of people are moving there and what it’s like during the off-season?
• Pretend you live there….act like a local!!
  You should visit the area yourself during different seasons to get a true feel for what it’s like on a year around basis. Scope out restaurants, shopping centers, grocery stores and what type of entertainment does the area offer?  Are there enough of the things you like to hold your interest?  Also check out the educational system, especially if your children will be attending school.  Good schools are often an influence in resale value.
• Evaluating the comparables.
  To determine whether the property is a good investment, be certain to review other home sales in the community.  What is the history of resale on similar properties?  Your real estate agent can provide you with invaluable information to help you reach an informed decision.
• What are the rules for renting?
  Expect additional research if you plan to rent the property. For example, some communities ban short term vacation rentals, and may only allow monthly rentals. Other communities may require a year’s lease.   The homeowner’s association and city ordinances can play a significant role in rules governing rentals.  On the flip side, if a quiet retreat is what you seek, you may not want to vacation in a community with high rental turnover.
• Most importantly, work with a professional real estate agent.
  A professional real estate agent can provide you with all the facts you need to make a decision which will make a major difference in a successful second home purchase. Here are a few tips for finding a great agent.
• Check local listings online or look in free sales publications that list the type of property you wish to buy.
• Find an experienced agent that has worked and lived in the area and knows the local market.
• If you are looking in resort communities or exploring alternatives like fractional ownership, consider an agent with experience in these markets.  .
• Even after the sale, a good agent will stay in contact and help you long after the purchase. This can be very important for homeowners who do not live near the property.  Ask your agent for references from past clients.

Step 3: Exploring financial options and negotiating with the seller.

Second home purchases are not unlike purchasing a primary home.  REALTORS® say putting 20 percent or more down is common for second homes to avoid the expense of private mortgage insurance (PMI) and with today’s tightened lending practices, that or more may be required.  You may also get a better interest rate with a higher down payment.   Your local mortgage lender will be able to provide you with the various programs available for second home purchases based on your financial position.

When it comes to negotiating, be certain to have a professional real estate agent to represent you. A buyer’s agent should strive to get you the best price possible, and an experienced agent should also have strong negotiating skills.

Tips to consider when investigating your financing options:

• For mortgage financing, use a local lender in the area where you are buying.  It will save you time and avoid problems as they will have the expertise and knowledge of the local market.
• Guidelines are more strict when qualifying for a mortgage on an investment property or second home. Typically, you pay a higher interest rate.
• If you do plan to rent, or need the rental income to qualify for the loan, you may need 25 percent down.  Lenders tend to give credit for up to a 75 percent occupied rate.
• Investigate other forms of financing such as tapping into your primary home’s equity line of credit, known as HELOCs.

Step 4: What are the ins and outs of taxes?

Tax planning is essential and can make a difference in your return on the property. Tax implications on second homes may vary greatly, depending on your financial situation and whether or not you plan to rent the property.  Keep in mind the following when figuring the impact on your taxes, and always consult your CPA or Tax Attorney for specific advice on your personal situation:

• Consider local property taxes, utility costs, homeowners’ association fees and other expenses.
• The mortgage interest on your second home is generally tax deductible, and rental properties provide additional tax advantages.  As an investment property, deductions will be different than your primary residence and can include depreciation of the real estate itself as well as a separate accelerated rate of depreciation on personal property such as furnishings.  If you plan to use the property personally, keep in mind owners can use the property only for two weeks a year in order to get certain tax benefits on rentals.
• If you rent for 15 days or more during the year, you will have to report all rental income to the IRS. You can also deduct operating expenses such as utilities, repairs, insurance and management fees against that income.
• Strategies for reducing or deferring capital gains when it’s time to sale the home should be considered.  Internal Revenue Code, Section 1031, involving tax-deferred exchanges, allows capital-gains tax to be deferred by exchanging for “like kind” property.  A 1031 exchange is used when you sell real estate held for investment purposes and not for the sale of your personal residence.
• Be certain to consult with a tax professional or a specialist in working with tax-deferred exchanges before getting too far into the second-home buying process.

Step 5: Research options for alternative ownership.

In addition to single-family homes, townhomes and traditional condominiums, you also have alternative forms of ownership such as fractional ownership, vacation clubs, time shares and condo hotels.  Tread cautiously…research thoroughly.

The resale value on certain types of cooperative-ownership properties may become a burden, as values may not hold up over time. Resale values on fractional ownership properties are usually higher than time shares because very few timeshares are actually deeded ownership.  You must also consider financing, which may be very difficult to obtain on these types of properties.

In closing, with real estate values down and interest rates very low, it just might be the perfect time for you to consider a second home, retirement home or investment property.   Make your decision based on well thought-out goals, and make certain you work with the right professionals such as a tax accountant, estate attorney and a qualified real estate agent.

If I can assist with finding a qualified agent for your real estate needs, please take advantage of my free referral services.  With our global presence at Coldwell Banker Sea Coast Realty, I can help find an agent anywhere in the US, and most international locations.   Please feel free to contact me at GlendaNewell@SeaCoastRealty.com

This stunning marsh front home on Bradley Creek in beautiful Heron Run is conveniently located just minutes from Wrightsville Beach and Mayfaire. Extensive renovation in 07/08 make this home show like new! Lovely hardwoods, 2 gas fireplaces, custom built-ins, surround sound in family room, deck and courtyard, immaculate kitchen with convection oven, gas cooktop with pot filler, custom slow close cabinetry, wet bar with ice maker, built in wine rack, stainless appliances, island and more! The exceptional master suite boasts a spacious shower, large walk-in closet and separate water closet. Lovely deck overlooking the marsh, fully irrigated lawn with well, extensive outdoor lighting, fiber cement board siding, composite decking for low maintenance living. Circular aggregate drive and walks lead to a protected courtyard, perfect for entertaining. This home is a must see and is quality throughout.

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