Suggestions on How to Buy Property
1. Purchase a vacation rental property. If you can't afford to own a nonrental vacation home, purchase a vacation property that you can rent out full-time, to defray your operating costs. Your goal is to begin
converting the property to a full-time vacation home for yourself in five to ten years. This strategy can be very successful for households that cannot afford the large monthly cash drain of a full-time vacation
home. Renting it out full-time will lower your monthly costs while building equity over the years. Eventually, your rent income will cover your fixed mortgage costs.
2. Purchase a nonvacation rental property. If you cannot afford the monthly costs of even a full-time vacation rental property, take an intermediate step: Buy an affordable nonvacation rental property. (See Chapter 9.) There are many rental properties where the after-tax cash flows are close to zero, or even earn you money each month. If you purchase a rental property today, you are indirectly taking advantage of the vacation market boom by realizing price appreciation in the general real estate boom. After five years or so, you can take your capital gains and principal accumulation and purchase a vacation property.
3. Use the equity you have built up in your primary home to buy a vacation home. If you can afford to buy a vacation home now, take advantage of the stored equity in your primary home.A cash-out refinance transaction (see Chapter 3) permits you to use the stored equity as a down payment on a vacation home.
4. Tighten your family budget. This requires setting spending priorities. For example, you may decide to forgo an expensive vacation for several consecutive years and save $10,000 or more for a down payment on a vacation home. Or you may hold on to your car for an extra few years, rather than spend $500 a month on new car payments, saving you $12,000 in two years for a down payment. Or you may do both, saving you $22,000!
5. Empty-nester trade-downs. If your children have moved out of your home, as an empty nester you have the one-time ability to sell your primary residence and downsize to a smaller primary residence, using the remaining capital gains to purchase a vacation home. Again, you'll avoid paying capital gains tax on the first $250,000 of gains for an individual and the first $500,000 of gains for a married couple.
6. Obtain adjustable-rate financing. Taking out a 1- or 3-year adjustable-rate mortgage on a vacation home may reduce your monthly mortgage payments by $200 to $400, depending on the size of the loan. This could be enough to make a vacation home purchase viable. But make sure that you can withstand the increased monthly payments if interest rates rise significantly.
7. Purchase a vacation home with another family. Spreading the costs of vacation-home ownership has become increasingly popular in recent years. If you can find another family or relatives that share your personal and financial views of vacation-home ownership, this may be a viable option.
8. Purchase a less-than-ideal vacation home. All right, you may need to forgo your dream vacation home. But by lowering your sights, you may be able to buy a perfectly wonderful vacation home in a less than red hot market, or a smaller home in the neighborhood you most desire. Be open to considering other options.
9. Move cash out of stocks into a vacation home. This option will be blasphemy for some. But there are an increasing number of households across America who are taking money out of the stock and bond market to purchase real estate. I believe so strongly in the real estate market that I urge you to consider diversifying your investment portfolio by transferring some of your investment funds out of stocks and bonds and reinvesting them in real estate. Using stock/bond investments to purchase a vacation home may be one of the most successful investments in the long run you ever make.