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For Dummies is a registered trademark of Wiley Publishing, Inc. in the United States and other countries. Used here by license.Welcome to the world of second-home ownership! If you’re considering buying a second home, you’ve come to the right place. Here, you can discover how wonderful it is to have a second home to run away to, how gratifying it is to rent your place for extra income (if you choose to do so), and how comforting it is to know that you’ll retire there at some point in your life if you so choose. A large number of people — many of whom have been disenchanted with low stock market gains over the past few years — have turned to investing in second homes. This strategy is twofold: Grab a nice slice of paradise while also putting money in a place where, thanks to the wonders of housing appreciation, it will (ideally) grow steadily over time. Owning a second home can be a fun adventure, but it isn’t free of some ups and downs. This article gives you an overview of what you can expect when you buy and own a second home. I explain why people buy second homes and discuss the second-home market. I also show you the good, the bad, and the ugly of owning a second home (and, yes, there’s always a little of each), and I help you avoid making mistakes when searching for the perfect second home. Finally, I help you get into the “real estate investor” mind-set, and I explain the roles that you the home buyer, your trusted real estate agent, and those unknown home sellers play in the process.
Identifying Why People Buy a Second HomePeople purchase second homes for various reasons, and you’re likely to relate to at least one of them. Perhaps you want to be able to get away at the drop of a hat and know that you have somewhere to go that isn’t a hotel room, a rented condominium, or your in-laws’ sleeper sofa. Second homes are commonly located in vacation-oriented areas and can be a great escape for you, as well as for your friends and family who are invited to make use of the place and its facilities and amenities (if, of course, things like a pool and tennis courts came along with the purchase). Or perhaps you simply want a fairly safe investment and plan to rent the property to make some extra bucks. This section gives you a brief rundown of some of the main reasons why people buy second homes. Keep in mind that this section is simply a quick glance.
A vacation getawayWho loves taking a vacation? Raise your hand. Of course, you have your hand up, right? Vacations allow you to take time off from work to escape the daily grind and relax and unwind. You can decompress from the stress of work, spend time with your family, and enjoy your surroundings. Many people buy second homes so they have a reason to take a few days off to get away and visit it! If you can make the time, a vacation spot is ready and waiting for you. Especially for hardworking people who tend to burn the candle at both ends (doesn’t that sound like you?), a second home is a great place for some downtime. Think about it: If you know that you have an empty, available beach home a mere five hours away, won’t you be more apt to go there, visit, and just relax? I know I would!
A place for family and friends to visitWhether you bring friends and family along on vacation, or let them use your digs on their own, friends and relatives will love the fact that you have a pad for them to use away from home — and that you’re such a generous sort that you don’t mind them enjoying it. Many people enjoy using their second homes as a gathering spot for friends and family. No matter if you’re at the second home with your kith and kin socializing for a getaway weekend or holiday, or some of your extended family is using your home for their own little getaway, a second home is a great way to bring your loved ones together. This book offers plenty of tips and advice on how to deal with these types of guests. For example, should you charge them rent. And how do you ask them to follow the house rules.
An investment (in the form of rent money)Some people purchase second homes for investment purposes. Rather than spend their vacations there, they rent the property with the intention of making some money. In doing so, they begin to build equity in yet another home, thus forming the foundation for a retirement nest egg that at some point can be sold to a third party or willed to an heir. By renting your place for more than 14 days per year, you not only can collect rent checks, but you can also gain tax advantages that owners who opt not to rent simply don’t have.
Just the stats, please: Why people buy second homesAccording to the National Association of Realtors (NAR), sales of second homes, in the form of vacation homes and investment homes, set records in 2005. In fact, the combined total of second-home sales accounted for 4 out of 10 residential transactions. The NAR reports that 27.7 percent of all homes purchased in 2005 were for investment, and another 12.2 percent were purchased for use as vacation homes. Altogether, 3.34 million second homes were sold in 2005, up 16.0 percent over 2004 — more than 9,000 second homes were bought and sold every day of the year! The NAR determined the reasons vacationhome buyers wanted a second home:
41 percent purchased their dwellings to use for vacations.
31 percent purchased a place to use as a family retreat.
28 percent bought to diversify their investment portfolio. For investment-home buyers:
55 percent said rental income was the primary factor for buying.
35 percent wanted to diversify their investments.
A space to peacefully retire to
Knowing that you actually own a delightful place on a gorgeous beach in Maui, and that it’s just sitting there waiting for you to come and live there full time, may be reason enough for you to purchase a second home. In fact, many people buy second homes with retirement in mind. Whether you plan to retire in 5 years or 25 years, you can purchase a second home and use it as an incentive to work hard and look forward to the golden years when you can relax. If you do purchase a second home for retirement, it doesn’t have to sit empty until you’re ready to move in permanently. You can use it as a vacation destination for yourself or friends, or you can rent it. Even if you have to rent it seasonally or full time in the interim, the home is still there (and still appreciating in value) while you put in those additional years of work and plan for the day when you can retire and enjoy it fully — and full time.
The Second-Home Market
Remember when having more than one house was a really big deal? Yes, there was a time when owning a second home was considered a luxury only afforded by the affluent, with everyone else content to stay in hotels or rented spaces while on vacation. The perception of second-home owners being King Midas has changed dramatically over the last few years. Low mortgage interest rates and an often uncertain and fluctuating stock market have pushed more people to consider real estate as an investment, rather than a necessity, or even a luxury. But do you wonder if you fit in the second-home market? If you want to see how you compare with these second-home buyers, this section can help you understand the second-home market a bit better.
Who is the second-home buyer?
The second-home buyer can be the person who is looking for a monthly escape of her own in a neighboring town or hundreds of miles away. The second-home buyer can be the shrewd investor who wants to add a few rental properties to his retirement portfolio. The second-home buyer can be the wealthy family that has always wanted to own their own chalet on the countryside in France. Knowing who’s buying second homes is useful in that you can easily tell if you fit into one of these categories, and this knowledge can help you decide if a second home is right for you. n 2005, the profile for a typical second-home buyer who uses the home for vacations was as follows:
He was 52 years old.
She had an annual income of $82,800.
He purchased a property that was a median of 197 miles from his primary residence. Also, 47 percent of these homes were less than 100 miles away, and 43 percent were 500 miles or more. In 2005, the profile of the typical second-home buyer who uses the home as an investment was as follows:
She was 49 years old.
He had an income of $81,400.
She bought a home that was relatively close by — a median of 15 miles from her primary residence. More than three-fourths of people who bought second homes for vacations have no interest in renting their property, and 21 percent said it would become a primary residence on retirement, compared with only 2 percent of people who purchased a second home as an investment. Furthermore, 14 percent of investment buyers and 6 percent of vacation-home buyers purchased a property that their son or daughter could occupy while in school. Where do you fit in? People of all ages and walks of life purchase second homes. If you’re paying your bills and enjoying life, and can afford the out-of-pocket expenses — down payment, closing costs, and other outlays associated with buying a home — the odds are you can purchase and use a second home — as a vacation home, a full-time rental, a future retirement home, or a place where you and your family can spend every weekend if you want to. And you don’t have to spend millions of dollars to get into your second home of choice. Many of today’s buyers are spending reasonable amounts of money to buy second homes. The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 in 2005, up 24.0 percent from $148,000 in 2004.
An agent picks his clients’ brains
One Chicago real estate agent I know does a good 5 to 10 percent of his annual business with second-home buyers eager to purchase property in the city’s downtown Streeterville neighborhood. That’s where theaters, opera houses, restaurants, and Navy Pier are flanked by oneand two-bedroom condos priced in the $200,000 to $300,000 range. Before the agent takes them out to look at properties, though, he first probes into the buyers’ wants and needs by asking questions like:
What will you use the property for?
What amenities or features are you looking for?
How long do you plan to own this property?
Would you be willing to upgrade it to maximize its value?
Would you rather spend more money on a finished condo unit, or would you prefer buying something that you can work on? Why all the questions? According to the agent, buying a second, intown home in Chicago is about convenience as much as it is about property appreciation. His second-home customers include folks ranging from investors looking for a city getaway, to parents who are purchasing homes for their college- age children attending school in the area. Most of his clients come to him through wordof- mouth referrals from bankers and lawyers, as well as through his firm’s excellent relocation department. (For more on working with a real estate agent, flip to Chapter 6.) And most of my friend’s clients are also thinking about exit strategies before they even sign on the dotted line. According to the agent, he often finds himself answering one simple question time after time: “If I needed to sell right away, how quickly could I do so?”
Location is everything
The National Association of Realtors asked second-home buyers which characteristics they sought out and valued most about their property. Here’s what they said about location.
40 percent said close to an ocean, river, or lake
34 percent said close to family members
27 percent said close to preferred recreational activities
27 percent said close to their primary residence
26 percent said close to mountains
24 percent said close to a preferred vacation area
17 percent said close to a job or school
Where are people buying second homes?
Knowing where the second home hot spots are can help you pinpoint the best place for yours, particularly if you don’t already have a specific city, state, or county in mind. By keeping an eye on where others are flocking to, you can get a great sense of where the best values, amenities, and attractions are without having to get on an airplane and see for yourself. People are purchasing second homes in various regions of the United States. According to the National Association of Realtors (NAR), in 2005, here’s how the second-home-sales buying pattern shakes out (in order of popularity):
The Midwest: 33 percent
The South: 30 percent
The West: 20 percent
The Northeast: 17 percent.
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For Dummies is a registered trademark of Wiley Publishing, Inc. in the United States and other countries. Used here by license.