Let me go out on a limb here by stating this generalization: Many buyers seek advice from professionals and yet, tend to negate that advice and do what they were planning in the first place. This is what ‘regret in real estate’ is often contributed to.
As the saying goes: Hindsight is 20/20 – When you can evaluate past choices more clearly. Though, like many who fall into a regretful pattern around their purchase, by ignoring proper guidance can cost over the years to come.
We wish for you to avoid any regret or frustration when purchasing a second home or vacation property because this is about building great memories from a positive foundation, not from disappointment.
On this Buyer Resources page, we will look into some of the more pressing questions you may face as a buyer. If you are willing to seek guidance from legitimate full-time professionals who conduct lifestyle real estate day in/day out the odds are in your favor for a very successful experience to build from.
1) Why Are You Buying a Second Property?
There are several reasons why you would like to purchase a second home or vacation property. Ultimately it comes down to two distinct purposes.
1. There is an emotional want or need to own a property in a lifestyle driven location, thereby creating healthy and happy memories for all to enjoy.
2. For financial gain. Whether it is investing in real estate to find renters to cover the running costs thereby having others pay down your debt or looking for appreciation on the property over time. The best case scenario is both at the same time.Either way, each lifestyle location, and the reason you are buying (emotional or financial) require the help and guidance of a buyers advisor who has exceptional knowledge of their own backyard and all the pros and cons that may affect your decision.
2) How Can Kealink Help You?
Our name suggests what we do. Similar to how a key for a lock works. “Key” a “link” (connect/match) you to an exceptional real estate advisor. For a key to work correctly, it requires the design of each cut, size of shoulder and the distance to the tip for it to be precise to become effective. Each part of the key has a purpose. We avoid you from using an ill-fitting key.
It is the same concept with a lifestyle real estate advisor. At Kealink we understand lifestyle environments and agents which work in these areas. Kealink has access to over 2 million agents across the country, with 95%, in our opinion, being inferior for your needs. That means for every one hundred agents, five are great. For you to find an advisor which is exceptional to your needs, would be a time consuming and frustrating process. To find one exceptional advisor, you would need to interview the average of twenty two agents.
Through Kealink, we provide you the convenience of selecting from a very short list of the top advisors in their localized market who align with your interests. By using the best advisors, you are protecting your family interest, including your financial capital.
3) What Expenses are Involved in Second Home Ownership?
If you are purchasing a vacation property for personal use, then your expenses will be similar to owning a residential property with a couple of additions. If you have taken a mortgage, often the interests rates are a little higher. Property taxes are often higher than those of a full-time resident, and you would likely have to retain some kind of property management company to help with landscaping and upkeep of the property. If this is a second home purchase and you need rental income to help cover
the mortgage and running costs, then you will have a few additional concerns and expenses. Following is a list you may want to consider when rental income is part of your purchase:
Property Taxes: You will likely have a higher property tax rate if the home is not a primary residence. For example, here in Park City, Utah, our resident tax rate for a primary home is approximate 0.50%. If it is a second home it doubles, close to 1%. There is one caveat you may wish to ask your buyer advisor about, especially if purchasing with long-term rentals as a consideration. Often a second homeowner can petition the municipality or jurisdiction to only pay the primary residence tax only if it is to be rented by a local resident.
Basic Utilities: If you are renting a property out short term, then those who are renting your property tend to be less considerate to the utility expenses than what you would like. Often properties are treated like hotel rooms where tenants tend to leave lights on, air conditioner units going all day, or leaving anything that runs power all day. With long-term lease agreements, tenants tend to cover these expenses.
Upkeep/Updating: There will come a time when the property gets run down. To much wear and tear over the years from short-term rentals or poor long-term tenants. Everything from carpets to landscaping needs to be tended to. You may consider doing this all yourself if you are doing property management of your property such as the case with many VRBO type buyers. This leads me to…..
Property Management: A majority of homeowners owners live a minimum of 250 miles away from their second property. Many properties are well over a thousand miles plus. That being the case, property management should become a necessary expense to cover. Second home property management could be considered as a type of insurance to protect the home, including a contact for any emergency repairs that may be needed, or to help avoid seasonal changes such as winterizing a home. These management companies help to preserve your investment. To help with the unknown expenses, often property management companies and vacation rental companies will provide their services a la carte.
Vacation Rental Companies: Often local vacation rental companies provide property management over and above rental splits. Vacation rental companies have the systems, historical data and statistical information to help book your property for the highest going rate possible throughout the year. Rental companies will market and advertise your property with the intention to fill your property with renters as often as possible. the more they can rent your property the more they make, as well as you, so the incentive is there. Each location in the country charges a different rate, usually a split of the overall rental. Vacation rental companies will then charge out all the expenses incurred such as cleaning or fixes. What is left is transferred to your account.
4) Can I Rent Out my Second Home?
Well YES. Well NO. Well….Depends!
In short, there are two main areas to find this information from: First, your lender can tell you based on the type of mortgage you qualify for. Second, your advisor can tell you if a property is rentable in the location you are buying. Either way, you must still read and understand the following to make the right decision.
Renting out your property as a long-term rental is rarely a problem. That is unless you are within an HOA which will not allow any type of rentals whatsoever. Owner use only. Thankfully these are rare.
Check with your lender as the rules for you to borrow money and how you can use the property can be restricted. That includes renting the property out too. More about this: What type of Lender/Lending should I get? (#6)
Short term rentals are usually approved in an HOA’s CC&R’s (Covenants, Conditions, and Restrictions) and/or municipal regulations at the time a development or area was built out.
Often, properties which are located close to tourist activities have minimal issues. Please note that some municipalities allow nightly short-term rentals, though the HOA does not allow it. In most cases, the HOA will have precedent.
Long term rentals are better situated outside of tourist active locations of a town. Primarily these are long seasonal rentals for 3 – 6 months for vacationers who enjoy the environment for a specific reason, or longer if they happen to be local residents of the area often job-related with school-age children.
5) How Much of a Second Home Should I Buy?
Yes, this can be a really exciting time….but… DON’T OVER STRETCH YOUR FINANCES!
It’s often the case that stating the obvious is similar to talking down to you, though this is not the intention. In reality, when emotional ideas and the “what if’s” take over, we tend to forget the simple things. Thoughts of grandeur drive the search to something a little more expensive. There is always a tipping point.
If you are looking to have rental income cover the running costs, any calculations you make have to be on the most conservative side possible. When I say conservative, I mean that if tourism slows down, with sporadic rentals coming in to cover your running costs.
If you are struggling to make the numbers work, then you may want to find a property that is less expensive. That’s quite ok because getting your foothold in the market can be very beneficial. A property which will act as a stepping stone to a future property.
Keep your thoughts of grandeur a concept to work towards than having it all now, because doing so can come back to bite…you know where!
There are situations such as the economy turning downwards. Ski season rentals could become less than ideal, especially with a poor snow season. Rains have made Autumn/Fall unbearable for people to rent around lake or coastal regions. You get the point. For example, if you believe you can rent your property out 60% of the year, do your calculations on a lower number like 45% instead. Any rentals above that are golden.
6) What type of Lender/Lending should I get?
As many States, Jurisdictions and Companies have their own regulations to abide by, make sure you conduct your own due diligence on the lender and what can and cannot be done in your particular location of interest.
When it comes to financing your second home or vacation property, understand that not all loans, nor the lenders are created equal. There are a few items to know about with lending rules and the riders because not all loans are the same. Choosing the wrong one can be costly, and in some extreme cases be considered fraud.
If you purchase a home for your own personal use, this would be considered a second home loan and the rates would be close to your residential home. If on the other hand, you are using the property for short-term rental income or pre-retirement long term rentals then you would need to consider lending as a non-owner occupied loan. This can be 0.25 – .375% higher than a residential mortgage rate. Any property purchase would also require a larger deposit down, often 30% of the sales price. Pending which state the property is located you will either receive a mortgage or a deed of trust stating all loan requirements.
Lenders are different, including the company they represent and the variety of loan portfolios they can offer. Some will charge origination fees, others will waive them. In my experience, you will have a smoother transaction when using a local lender which understands the dynamics of the local market and all the intricacies of each development and neighborhood. Local lenders tend to be more willing to work for you as a person.
Out of state banks, such as the large banking conglomerates can offer good rates but at what cost? In my experience clients have to jump through more hoops and cut through more bureaucratic red tape before getting to underwriting, the most stressful part of purchasing any type of real estate. Unless you have a Private Banker working for you, clients are considered a number and with that goes the service and transparency. I have seen many deals fail because of contractual timing and dates.
When you are placing $10, $20, $50,000 dollars down as earnest money, relying on an impersonal banking system can be incredibly stressful. Especially when out of state loan officers do not understand the intricacies of the market and have to rely on others who likely have little understanding too. It’s a tough one. Your Advisor can certainly put you in touch with the best lenders in the local market. The better your advisor the better the network is at your request.
7) What will buying a second home do towards my taxes?
Since we are about to discuss general tax and financial matters here, make sure you confirm any information you read with your accountant or tax preparer for further, more current, in-depth information.
Yes, the tax man will want a piece of your pie if you are renting out your second home or additional properties for more than 14 days per year. Anything less may not have to be reported. When it’s time to file your income-tax return, you can itemize and
deduct real estate property taxes from both your primary residence and your second home (and on any additional homes you own), but keep in mind that the new Tax Cuts and Jobs Act of 2017 caps this deduction at $10,000.
If you’re taking out a mortgage to buy that second home, you can also deduct the interest on up to $750,000 of mortgage debt used to acquire your first and second homes or to improve those properties. (The new law reduced this from the previous limit of $1.1 million.) If you plan to use your second home for only part of the year, during other periods you may want to rent it to other vacationers to help offset the costs of maintaining the property. Remember that if you rent the home for more than 14 days of the year, you must report that income on your tax return. Some homeowners are surprised to learn that if they rent the house for just one month, that income is reportable and taxable — even if they have no plans to rent it again in the future. In addition, any deductions you take (such as the property tax or mortgage-interest deductions mentioned above) may be limited to the amount of rental income generated by the property.
8) Should I use Zillow, Trulia, Realtor.com for a search?
Yes, that’s completely fine. These sites are good for conducting a preliminary information search for available homes. In fact, they pull the same information from the corresponding MLS locations around the country, which regurgitate that same information onto their platform. Well, all EXCEPT the information you need to make an educated and qualified decision that is.
If you use an agent through these portals, you are likely doing yourself a disservice. Hiring an agent because others had a good experience maybe fine in congested cookie-cutter residential neighborhoods where life and location are primarily the same. Not so in dynamic and segmented lifestyle markets where prices can fluctuate tens of thousands, if not hundreds of thousands of dollars. Only well established advisors who understand your interests will have your best interests in mind.
In lifestyle markets, a majority of agents are usually part-time, unreliable, marginal or even average at best. I believe this makes up the 95% of agents you need to stay clear from. The other 5% are incredible.
Here’s another way to look at it:
If there was no cost or obligation to choose clothes off-the-rack versus having a tailor measure all of your specific details and design an excellent product that makes everything fit perfectly, what would your preference be?
To order dinner from an average fast-food restaurant instead visit a local establishment which uses farm fresh products to create a meal specifically designed for your taste buds to savor…which would you prefer? It’s no different in real estate. You can choose the “pick and click” method from a variety of agents, or have the best advisors located and screened to match your interests?