Second Homes;
Vacation getaways or the new route to economic security?
by Barbara E. Cohen
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courtesy of EscapeHomes.com |
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Among the many properties offered by EscapeHomes.com, an online merchant for vacation and second homes, is this San Diego abode, which is listed as an ideal retirement investment. |
Take a topsy-turvy stock market, add low interest rates, toss in an increasing number of Americans looking for secure investments ... and voilà! You have the recipe for a booming real estate market, which is just one reason why more and more homeowners have been investing in second and even third properties. In fact, 2003 was a record year for the industry — approximately 445,000 second homes were sold, a 24-percent jump from 2001, according to the the National Association of Realtors' (NAR) latest statistics.
Among those who've taken the plunge is Stephen Skidmore of Cambridge, Mass., who bought a vacation property in 1997 and two rental investments in 2000 and 2004. "The best thing about owning a second home is the sense of ownership," says Skidmore, a senior marketing manager for an information management firm. "I'm controlling a piece of my future in a tangible way, and I have something to show and be proud of for the efforts in my work life."
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courtesy of Tom McGurk |
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The vacation cabin of member Tom McGurk, outside of Dunwoody, Ga. |
Skidmore especially enjoys retreating to his vacation condo in Maine, which he visits with his wife and 21-month-old daughter about once a month. Not surprisingly, second homes have been popular vacation spots for generations of Americans. "Building that kind of family history is one very strong reason people invest in a second home," says real estate journalist Tom Kelly, co-author of "How a Second Home Can Be Your Best Investment." "A vacation home builds memories, emotions and experience, so the decision isn't just a financial consideration."
For some, owning a getaway abode makes more sense than shelling out hotel- or cabin-rental fees year after year, despite the expense and upkeep involved in owning a property. For others, like Madonna and Michael Kelly of Arlington, Texas, it's all about nostalgia. Four years ago, the Kellys snagged a great deal on a vacation home surrounded by 40 acres of farmland near Michael's hometown — 240 miles from their primary residence. "My husband always wanted land in that area," says Madonna, who takes her family to the spot about six times a year. "We're not sure if we want to retire there, but the sale of land is so good, we felt that we couldn't go wrong."
But while the lure of a getaway cabin can be strong, more and more people are buying property to capitalize on long-term stability in the real estate market compared to other investments, such as stocks, mutual funds and certificates of deposit. According to NAR, the share of second homes purchased as investment properties is continually increasing. Moreover, in our first-ever website poll of members, Angie's List found that more than 60 percent of respondents who own a second property use it for investment. "A second home isn't for everyone," Kelly explains, "but for part of your investment portfolio, real estate will perform equal to or better than conventional financial markets, such as CDs or stocks."
Adam Minton of Columbus, Ohio, is one of many who've purchased property for such reasons. He and his wife have acquired eight investment homes — seven rentals and a vacation cabin — to provide for their family's future. "I bought real estate for vacation and to subsidize our retirement and a college education for our two children," says Minton, an insurance agent and underwriter.
Of course, there are those who purchase property simply for retirement, including a growing number of baby boomers. With this generation in their peak earning years — and quickly approaching retirement — boomers represent an impressive share of second-home buyers. Many are even using funds they would otherwise invest in conventional retirement plans, such as IRAs and 401(k)s, to purchase their second homes.
Dan Dixon Sr. of Minnetonka, Minn., however, currently rents out his retirement condo for investment income. "I bought it for the security," says Dixon, who is self-employed. "We have a retirement home when we're ready to retire, which will probably be 10 or more years from now."
According to Kelly, Dixon represents a growing number of people whose second properties serve more than one purpose. Although the markets for retirement, vacation and investment homes used to remain separate, Kelly says, the lines are now blurring, thanks in part to several 1997 tax reforms that allow a property to assume all three uses simultaneously or sequentially.
But whether you dream of a retirement condo, vacation cottage or rental investment, it can be difficult to determine whether acquiring a second property is really in your best interest. "This sort of investment is usually not for someone starting out or looking for their first and most important investment," says Elaine Bedel, an Indianapolis financial planner deemed one of the nation's 100 most exclusive wealth advisors by Worth magazine. "Getting the full value of a second home or investment property takes time. Think of it as a long-term, non-liquid investment."
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photo by Margaret Rizzo |
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Kerry Kuehn of Kansas City owns two rental properties for investment purposes. |
Before considering a second-home purchase, Bedel advises clients to look at their entire investment portfolio and evaluate long-term financial goals — don't short-change other savings needs, such as education or healthcare. "A second home is a great place to put extra cash," she says. "When I lay out someone's [investment] choices, I caution against investing more than 10 percent of assets in real estate because this is not a liquid asset. You can't always get your money out fast, and the market can be volatile."
And while real estate has generally performed better than stocks since 2000, second homes come with the hidden expenses and burdens of owning a property. In addition to a mortgage, insurance and taxes, experts say, homeowners must also consider the costs of utilities, maintenance, landscape upkeep and snow removal, emergency repairs, finding reliable tenants for rentals — the list goes on. No one knows this better than Minton, who faced an unexpected and expensive surprise in the summer of 2004 — an $11,000 bill when the roof on one of his rentals needed replacing.
Furthermore, not all housing markets have outperformed the stock market — which is why Bedel and Kelly suggest reviewing appreciation rates over several decades before buying. Bedel says real estate in California, Arizona, Florida and the Carolinas is appreciating, so buying a second home or lot there might be a good idea for baby boomers looking for a future retirement home. "If you buy it now," she says, "you can live in it or sell it later, after it appreciates."
Still, once you decide to make a move and purchase a second property, the real work begins. First, mortgage consultants recommend obtaining pre-approval for a loan if you plan to take out financing. "So you know what you can afford," explains Kim Terning, a private mortgage banker at Wells Fargo Bank in Minneapolis.
Moreover, mortgage consultants can help you determine the type of financing option that is best for you. According to the latest NAR surveys, the median cost of a second home is in the range of $190,000 to $200,000 — and there are a variety of options to bankroll such an acquisition. "Many of our clients partially finance the purchase using their bonuses or commissions, and they're looking to pay off the second home before they retire," Terning explains. Other popular options are mortgage loans, savings and equity from a primary home or refinanced property — and alternative options such as real-estate IRAs and reverse mortgages.
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photo by Mandy Stetzel |
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Indianapolis financial planner Elaine Bedel advises clients Matt and Cassie about their investment options. |
After the pre-approval stage, experts suggest organizing your priorities. David Hehman, president of EscapeHomes.com, an online marketplace for vacation properties and second homes, says you should outline your criteria and find a realtor before you shop. Determine your interests and limitations to avoid getting attached to an unattainable home. "Buying a second home is a very emotional purchase," Hehman says. "Understand your motivation, which will help [a realtor] help you locate a great property."
For Tom McGurk of Dunwoody, Ga., who bought a vacation cabin in 2004, the motivating factors in finding a suitable leisure property were atmosphere and proximity to his primary residence. He says his wooded cabin, which is about 80 miles from his home, works out well. "We wanted the opportunity to get away from home for the weekend without too much complication or planning," says McGurk, a manager at a national accounting services company.
However, McGurk says the monthly mortgage payment for his cabin — which is about the same as that of his primary home — can be a burden. "It was a fairly large psychological step to double the amount of mortgage debt we have outstanding," McGurk says. "Writing two mortgage checks a month is something that takes getting used to."
Indeed, the price tag associated with second homes — including property taxes — has long been a deterrent for some. While several buyer-friendly tax reforms passed in 1997 unleashed a flurry of second-home purchases, there are still numerous tax implications that vary depending on whether the home is use for vacation, rental or retirement.
Kenneth A. Pikor of Westerville, Ohio, a certified financial planner and enrolled agent, a tax expert licensed by the federal government, says your best bet is to consult an enrolled agent when considering taxes. For instance, if you own a vacation home but want to rent it out while not using it, you could face additional tax, liability and insurance burdens, and taxes and mortgage interest might not be deductible depending on your circumstances. With properties used strictly as rentals, Pikor continues, there are even more things to consider. "When purchasing rental property, the No. 1 consideration should be that it is structured for positive cash flow," he says. This means the rent you charge should cover all of your expenses — mortgage, taxes, insurance, upkeep and a monetary reserve for emergencies.
| Second Property Checklist |
| Follow these tips to ensure a successful second-home purchase. |
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1. Be clear about your motivation, goals and limitations. Determine the kind of property you'd like — a condo, single-family home, land or new development. |
4. Prepare a well-researched offer. Consider other properties in the area, the seller's motivation and any additional expenses involved in buying and maintaining the property. |
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2. Organize your finances before shopping, and review your credit report. If you plan to obtain a mortgage for financing, get pre-approval. |
5. In securing a mortgage loan, choose a lender or broker and negotiate the best deal. Talk to an enrolled agent about taxes. |
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3. Find a home. Research locations, review your wish list, take a scouting trip and find a qualified realtor to help. |
6. Close the deal. Estimate closing costs and schedule your final walk-through before signing the purchase contract. |
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Source: EscapeHomes.com and other real-estate experts. |
While no one can predict the future, experts say that favorable tax laws, anxiety about the stock market and retiring baby boomers should promote a good outlook for real estate investing. "The market should stay strong — maybe even get stronger — for the foreseeable future," says John Tuccillo, co-author with Kelly of "How a Second Home Can Be Your Best Investment" and foremost real estate economist.
Whatever the case may be, buying your second home can be just as exciting as your first — with the proper planning. "Establish realistic priorities and be pragmatic about the finances and responsibilities," advises Hehman. "That will increase your chances of enjoying your second home, whether it is for investment, retirement or leisure."
Worthwhile investment
or money pit?
Angie's List members sound off about the pros and cons of owning a second home:
Adam Minton of Columbus, Ohio, likes the tax-deferred appreciation and having someone else pay the mortgage on his rentals, but he disliked having to replace an $11,000 roof on one of his properties during the rainy season.
"The best thing about an investment property is having diversity in my investments. The worst thing is the cost of maintenance, upkeep and finding reliable companies to help," says Linda Hennigh of St. Louis, who owns two rentals near her primary home.
Marilyn Geiger of Cherry Hill, N.J., who bought a rental investment four years ago to supplement her retirement savings, likes having the extra income but worries about collecting rent payments. "I've been lucky so far," she says, "but my tenants are professional."
While he enjoys the convenience of his quick getaway cabin, Tom McGurk of Dunwoody, Ga., says writing two mortgage checks every month can be a drawback.