Considering a second home?

December 2, 2005

It could be a dream come true, or a nightmare. Here's what you should do to tip the scales in favor of the former.

Real estate agents cite three reasons people buy a second home: investment, enjoyment, and retirement. For some buyers, it's the home they've always dreamed about, a place close to the beach or on a golf course or at the bottom of the ski lift.

Whether used for business or pleasure or both, second homes are increasingly popular. Approximately 36 percent of all homes purchased in 2004 were second homes. But much of the most desirable land for building recreational property has already been developed in established vacation-home destinations, such as Cape Cod, the Jersey shore, or the Florida Keys. Whether that will support healthy price appreciation in the future is questionable as mortgage interest rates rise. If owners of second homes are forced to sell their properties because of rising interest rates on adjustable rate mortgages, prices could flatten or drop.

While thoughts of a second home may inspire many pleasant daydreams, there are several things you should consider before making what could be the second biggest purchase of your life.

Most vacation-home owners want their property for their exclusive use, with 86 percent saying they never rent their properties, according to the National Association of Realtors. If you and your family will be the only ones using the second home and never intend to rent it, the most basic question is: Are you able to take on the financial burden of another home? Even if you'll use it for only part of the year, you'll have all of the expenses of home ownership-down payment, mortgage, closing costs, taxes, insurance, utilities, upkeep, and, if it's a condo or co-op, association fees and common charges.

Consider too, the distance between your primary home and the vacation home. Many vacation homes are located relatively close to the owner's primary residence, with a median distance of 49 miles. If the property is quite a distance away, will you use it often enough to justify purchasing it?

Take a look, too, at what the area offers. Is it popular, in case you need to raise cash relatively quickly through resale? If you won't be there often, can you find reliable people to look after the property and maintain the lawn, driveway, etc.? If you purchase your second home in a resort area, there may be management services that will take care of these chores for a fee.

Advice if you plan to rent the home

Ryan P. Wells, a financial planner with Wells Financial Group of Walnut Creek, CA, has a 57-year-old doctor-client who purchased a 2,100-square-foot home in 1983 for $165,000. The physician and his family lived in it for two years, then moved to a larger property. Originally, it rented for $1,500 a month. Now the rent is a little over $3,000 a month, in what Wells describes as a very soft rental market. Since the client had a 15-year mortgage, the house is paid for and annual ongoing expenses are about $6,000.

"Rental income is the doctor's first objective for this property," Wells says, "but he's enjoyed capital appreciation on it as well. It's currently valued at $1.1 million."

Maybe you, too, are figuring on renting that second home for part of the year to offset the expense of owning it, or to make a profit on your investment. If so, will you mind being an absentee landlord? Will you use a real estate agent to find renters, or will you do it yourself? If you choose to do it yourself, how will you screen applicants? Giles K. Almond, a CPA and financial planner in Charlotte, says, "With the tenant's consent, a landlord can obtain a credit report for a fee at http://www.landlordcreditreports.com. Ask for references and collect a rental deposit up front. Have a written rental agreement that details responsibility for any damage to the property. A property management company can handle these issues for you."