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Before
you run off to invest in a log cabin retreat
or beach front villa, listen to the advice of
financial planners and second home owners themselves:
The realities of owning a second home are often
far different from our fantasies. Typical surprises
include:
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» “It
costs more than we thought.”
» “We’re
using it a lot less than we thought.”
» The
area around our second home isn’t what we thought
it would be.”
» “We’re
having more conflicts than we anticipated.”
There has been a drop nationally in “second” home purchases, down
about 2% in 2003 from 2001 figures according to The National Association of Realtors.
In spite of this cooling interest, second home buyers and owners can be happy
and profitable if they are realistic about what they are getting into. The following
tips can help:
Many of us think we’d like to own our second home for life, but few properties
ADAPT to our changing lifestyles. The quaint house by the lake might be perfectly
suited for a childless couple, but it could be hazardous for toddler-aged grandchildren.
Your teens might love the party atmosphere of a congested-area beach front condo,
but will you? If a family member has a serious medical condition, is the prospective
property near a hospital and/or adequate services?
Financial planners argue that, if you only intend to get a few years out of the
place, RENTING makes more sense than BUYING.
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Second
homes typically come with all the costs associated
with first homes, with the possible additions
of boat storage, golf course, association and
private road costs.
Insurance rates can be higher as well, with some insurance companies charging
high-risk premiums on properties located in “exotic locations.”
Be aware of these costs and how they will impact your budget.
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It
goes without saying that a second home buyer
will need a large amount of disposable income
to cover the operating costs of two homes; in
fact, The National Association of Realtors estimates
the average annual income of a second home buyer
is AT LEAST $85,000.
Look at your TOTAL financial picture: are your credit cards paid off?
Do you have an emergency backup fund equal to a months’ expenses?
Explore the
tax advantages, but remember that write-offs are limited to TWO homes, and deductions
vary depending on how long you stay in your second home every year.
Know what you want BEFORE you buy: is this a vacation home or an investment property?
Financial planners will tell you to avoid the trap of becoming “emotionally
invested” in your real estate.
If appreciation of rental value is your financial goal, you’ll need to
select a prospective property with an excellent location and amenities with wide
appeal (good schools, shopping, etc.). Remember: HOT markets can COOL, and “marginal” properties
in a once-hot area lose value faster than first-rate properties.
Expect lenders to require larger down payments for investment properties, typically
1% higher than residential properties. Although a majority of buyers purchase
a second home for recreational use, the number of people investing in a second
home to make money is growing.
Really think about WHY you want this second home and WHAT you intend to gain
from owning it.
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Think
about HOW you will sell your second home when
the time comes; there are alternatives to simply
dumping your property back into the market and
taking your chances.
Because any profit you accumulate on a second home is subject to capital gains,
you might consider making your second home your primary residence for two years.
This way you’ll escape any tax on profits from the sale of your second
property of up to $250,000 per owner.
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Another
angle to explore is a “1031 exchange,” where
the IRS will allow you to exchange your rental
property for similar real estate without owing
taxes on the gains. Be sure to consult a financial
planner skilled in exchanges as the IRS does
not allow do-it-yourself procedures.
Owning a second home can be an important part
of any family’s financial
portfolio. With a clear purpose, consideration of the costs involved, and a
fiscally sound way to sell the property when the time comes, second home ownership
can be successful and fun.
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For any questions
or comments contact:
Barry
Brady
Direct: 408-201-0160 : Mobile: 408-623-1192 :
Fax: 408-273-6927
E-mail: BBrady@InteroRealEstate.com
Intero
Real Estate Services
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18600
Castle Ridge
Drive
Morgan Hill, CA 95037
  
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