Go ahead and buy that vacation home! Right now is a great time to invest in a second home. Whether you turn it into a rental property or use it for your own enjoyment, you will be locking in what could be your future retirement home at today’s prices.
With home prices being at an ultimate low and mortgage rates between 3% and 4%, you should really start looking! There are four reasons to consider before buying a second home: finances, fun, family and the future. If you turn it into a rental home, it can be a little extra money each month. If you use it for yourself, think of the fun you and your family can have. Finally, the future is not that far away and when it comes, won’t it be nice to have a cozy place to relax in and spend your golden years?
AOL Real Estate gives us 5 great reasons to buy a second home.
Location, Location, Location
We’ve all heard the real estate maxim that location is everything. Well, that truism is especially important when it comes to buying a second home.
Nobody buys property with the expectation that it will decline in value. Unfortunately, however, that’s a fate that can happen if you’re not selective about where you purchase. To increase your odds of having great resale value, stick to properties in popular areas, like near beaches, lakes or mountains.
Another location tip: think globally when it comes to second-home opportunities, especially if you’re considering a home that you may retire in. Why be bound solely to America, when exotic and low-priced areas of the world also beckon?
Some of the world’s most affordable housing markets — including Canada, the Caribbean and Central America – are all relatively close to the U.S., yet dramatically cheaper. That fact, combined with growing American angst about everything from job security to social security, means that more pre-retirees in particular are expanding their real estate horizons.
A 2010 survey by International Living magazine found that 96 percent of those polled are more likely to move out of the U.S. now than they were in 2009.
Says Elaine Finnegan, events director of InternationalLiving.com, “There seems to be a groundswell of discontent in the U.S., and we’re seeing a record number of people who are ready to vote with their feet and get out while they can still afford to do so.”
It’s a Pity It’s Not Just PITI
Of course, cost is a major consideration when contemplating a second home.
Mortgage interest rates are at historically low levels – around 4.6 percent. However, interest rates on second homes typically run about half a percentage to a full percentage point above rates for your principal residence. Insurance costs can be higher too, particularly if you buy a vacation property in a hurricane-prone locale, such as Florida.
The most important cost consideration, however, is one that most people probably never think about. It’s the overall true cost of owning and maintaining a second home. Don’t make the mistake of underestimating the real cost of homeownership for a vacation property, or even a piece of rental real estate.
Common wisdom tells you to think about PITI – Principal, Interest, Taxes and Insurance – when purchasing a house. With a second home, however, you’ll need to think well beyond those parameters. An additional home could mean that you’ll have to pay for some, or all, of the following:
• Advertising for renters
• Carpets, flooring and rugs
• Chimney servicing
• Fees to a landlord or professional property manager
• Gardening supplies
• Home improvements (additions, renovations and upgrades)
• Lawn care
• Lighting fixtures
• Moving costs
• Supplemental insurance (earthquake, flood, hurricane or tornado coverage)
• Window treatments
This laundry list of costs represents hidden expenses that all contribute to the true cost of homeownership. You’d be wise to set aside money in a Home Expense Fund each year. Stash away at least 2 percent of your home’s value in order to pay for the items above without going into debt.
Don’t Forget the Tax Man
When you rent out a second home, you’ll have to adhere to strict IRS rules in order to reap the biggest possible tax benefits from your real estate investment. Tax laws concerning second homes are complicated, so you’ll definitely want some professional advice in this area. However, you don’t need an accountant to teach you the basics.
First off, there’s the capital gains exemption. With your primary residence, you are allowed to exclude up to $250,000 in capital gains when you sell your house. The exemption is even larger ($500,000) if you are married. Unfortunately, that same capital gains exemption doesn’t apply when you sell a vacation home. To get the tax break, you’d have to make that vacation property your primary residence for at least two years.
Then there’s what I call the “14 day rule.” This refers to the number of days that you rent out a second home. If it’s 14 days or fewer, you don’t have to report that rental income to the government; thus you don’t pay taxes on that income. The downside, though, is that you can’t write off any expenses you might incur for renting out your property.
If you rent out a second home for more than 14 days, you are legally permitted to deduct expenses. Your deduction is limited if you use the home for personal reasons for more than 14 days a year, or if at least 10% percent of the total rental days are for personal use.
As with most things tax-related, IRS rules can get complex, so be sure to enlist the services of an accountant to minimize your tax burdens – and stay on the right side of the law.
So this holiday season, instead of exchanging presents, maybe you will be exchanging house keys!
information provided by AOL