Introduction

One out of every three homes in the United States today was bought as a second home. We're in the midst of a second-home ownership boom, fueled by such factors as the shrinking American family, older and wealthier households, and new technologies for working from home.

And now you're thinking about taking the plunge. Maybe you're looking for an alternative to other investments and will rent or resell the house. Or maybe a cabin by your favorite lake or ski area is calling to you. And if you're thinking ahead toward retirement, you may want to find a manageable, well-located home now.

Whether you plan to buy a second home for investment, vacation, or future retirement, this book is for you. It covers everything you need to know, from how to locate a house that meet your needs, to ways to stay within your budget, to a crash course in being a landlord. We cover topics you may be curious about but won't find in other home-buying books, such as how to buy jointly with friends, how to arrange loans from family members, and how to choose the best place to retire. And we help you understand some complex legal and financial matters, to make sure your home is a good investment no matter your reason for buying it.

What's Your Main Reason for Buying a Second Home?

Before you so much as open the real estate section of your newspaper, decide what you really want out of your second home. And, of course, discuss your goals with anyone who'll be buying, or moving, along with you.

Most people looking for a second home are doing so for either:

• investment, or to earn money from rental income or home-value appreciation
• vacation, or to find a destination to escape the daily grind, or
• future retirement, or to establish a place to enjoy the post-workforce years.

Choosing and staying focused on your main goal will help you make later decisions, for example regarding the type of home you choose, where it will be located, and whether or not you will rent it out.

You may already know which goal is uppermost in your mind. But take a moment to review the characteristics of each type of second-home buyer, below. This is your chance to feel certain about your choice and learn what's unique about your home-buying needs.

Buying a Second Home for Investment

If you see a home with deeded beach rights and the first thought that pops into your head is, "Wow! imagine how much I could sell that for after a few years and a paint job," then you're probably motivated by investment goals.

Investors heed one thing above all others -- getting a healthy return on their second home, be it through rental income or, more likely, appreciation. Everything else takes a back seat. Investors view buying a second home as simply an alternative to putting money into stocks, bonds, or other investment vehicles, and their decisions about purchasing a second home are methodical and financially based. Instead of scouting for a home in their favorite vacation destination, investors might buy one in a town where they'd never go, but which has had a track record of steady appreciation in home values.

Buying a Second Home for Vacation

If you see a home with deeded beach rights and the first thought that pops into your head is, "Wow, a private beach where I could relax and leave the craziness of life behind," then you're thinking like a vacationer. You're probably already fantasizing about using your second home during your free time, holidays, or peak sport seasons. While almost every vacationer wants a second home to be a good financial investment, turning a profit is not the main motivation.

Don't confuse a vacationer with an investor who buys a vacation home. A true vacationer buys a second home for personal enjoyment above all else. If the property is rented out, it's usually only as a means to offset expenses. When an investor buys a vacation home, the purpose is to profit from rental income, appreciation, or a combination of the two. In many cases, an investor won't even use the home personally.

For vacationers, decisions about purchasing a second home are driven by emotion more than by logic. For example, a vacationer who has always dreamed of owning a condo on Poipu Beach in Kauai isn't going to buy one on the other side of the island in Hanalei Bay just because it promises to appreciate at a faster rate or would command a higher rental price. That's not to say a vacationer doesn't ever rent out a second home to offset expenses, or even look for the home to appreciate in value. Rental or other profits are not, however, the driving factor behind a vacationer's buying decisions.

Buying a Second Home as a Future Retiree

If you see a home with deeded beach rights and instantly think, "What a great place to live after I've stopped working," you're thinking like a future retiree. It doesn't matter whether your retirement date is just around the corner or decades away.

With people living longer (current life expectancies are around 75 years for men and 80 years for women), retirement has the potential to be the start of life, not the end. Buying a second home now for future retirement could give you a jump start on the good life.

Like vacationers, future retirees often rent out their second homes to offset expenses, and even look for the home to appreciate in value. However, rental or other profits are not the driving factor behind future retirees' buying decisions. Rather, their goal is to have a second home they can ultimately call "home."

Buying a Second Home for Mixed Reasons

Of course, you may have a mix of motivations. Perhaps you want the home primarily for vacation purposes, but will also treat it as an investment property by renting it out for parts of the year, and will maybe even retire in it afterwards. That's fine -- but decide which of your goals (investment, vacation, or future retirement) is number one, so that you'll stay focused as you enter the homebuying fray.

Your secondary motivations for buying can, however, be important in helping you develop a backup plan for your property. You know what they say about the best-laid plans: An investor who planned on flipping the property may watch house values plunge 10%; a vacationer may receive an unexpected job transfer to the other side of the country, meaning significantly less time spent at the weekend getaway; a future retiree whose second home sits at 3,500 feet above sea level may discover that high altitudes aggravate asthma.

As you look at potential houses, it's worth thinking, "If I can't use it for this, maybe I can use it for that." Here are some likely backup plans:

• The investor who planned on flipping the property could plan to rent it out and use the income to offset expenses until house values rise again.
• The vacationer facing an unexpected job transfer could plan to rent out the property for most of the year, using it for vacations only a few times a year.
• The future retiree with asthma could either sell the property at a profit or rent it out year-round and wait for house values to climb.

Seven Steps Toward a Successful Second-Home Purchase

If you're ready to embark on your home search, let's not waste a minute. Your seven most important steps toward finding and buying your dream second home are right here. Once you've got these down, we'll fill you in on the details in later chapters.

One: Decide Whether a Second Home Makes Financial Sense

Whether or not you consider yourself an investor, you no doubt want your second-house purchase to be a sound financial move. Yet many second-home owners complain that the house cost more than they'd ever imagined. You'll want to tally up your likely expenses, work on building up your cash reserve, and determine how much you can expect from rental income. This book will give you worksheets and detailed information to do all these things.

Two: Decide Where, and What Type of Home, You'll Buy

A home in a badly chosen location won't serve anyone's goals -- the investor can't sell or rent it, the vacationer won't enjoy it, and the future retiree may have to pick up and move again. You'll need to rely on both market research and your own personal preferences. The type of home you buy is similarly important. The demands of owning a single-family home are different from those of owning a condominium, townhouse, or co-op. Which type of home serves you best will depend on factors such as cost, location, and upkeep. Finally, you'll want to look into unique possibilities such as a fixer-upper or a for-sale-by-owner (FSBO) property, all described further in this book.

Three: Understand the Tax Implications Before You Take the Plunge

Taxes on your second home come in all shapes and sizes, yet have one thing in common -- they can be a burden. However, you can, with some advance planning, save thousands of dollars a year in taxes. For example, sometimes buying a home just over a town's border can significantly trim your annual property tax bill. If you plan to both vacation in and rent your home, understanding how the IRS treats combined uses of the home, and what deductions you can claim, may also save you a bundle. And, if you sell your second home at a profit down the road, a like-kind exchange can, in certain situations, help you defer paying capital gains tax.

Four: Come Up With Short-Term Cash and Long-Term Financing

Most people pay for their home with a combination of a down payment and a loan for the remaining amount. The higher your down payment, the lower the loan amount, and the more house you can therefore afford. In order to come up with down payment cash (ideally, 20% of the purchase price) you may need to get creative. Using equity in your primary home, borrowing against a life insurance policy, and reducing your spending are among the possibilities explored in this book.

Most buyers will also need to get a home loan to help with the rest of the financing. The number of mortgage options available today could make anyone's head spin. And some of them may tempt you into highly risky behavior, such as paying only the interest you owe for several months or years, only to be walloped with a large, lump sum payment at the end of the loan period. However, by reviewing various mortgage options and sample payment schedules, and factoring in your own short- and long-term goals, you'll be able to choose a mortgage type that suits you.

Five: Consider Nontraditional Financing Methods

With real estate prices at record highs, you may have a harder time affording a second home than your parents or grandparents did. One unique way to help finance your second home is to tap the "Bank of Family and Friends." That lets you keep the tens of thousands of dollars in interest you'll pay over the life of your mortgage loan within your circle of friends or family, rather than handing it over to an institutional lender. We'll explain how to approach prospective friend-and-family lenders with a written proposal, and create the appropriate legal documentation when the loan is made.

Another money-saving approach is to partner with another purchaser, for example sharing a vacation home in the sun. A growing number of people have already discovered that partnering with a family member, a friend, or even a stranger who's looking to invest can make second-home ownership a reality. You'll want to start by determining whether co-ownership with a particular person is likely to work, and draft a written agreement to deal with likely sources of contention in advance.

Six: Be Prepared If You'll Be a Landlord

Some second-home owners plan to rent out their properties long-term with the intention of eventually turning a profit, while others just want to rent out their property periodically as a means to offset expenses. Either way, you're taking on the role of a landlord, which means more than just following your instincts. Finding good tenants or trustworthy vacation renters, understanding and preparing leases or short-term agreements, and dealing with ongoing management and repairs are just a few of the issues involved with being a landlord. Also, the obligations of managing a long-term rental are quite different from those of a periodic or vacation rental. This book will delve into these differences and provide advice on how to be an effective landlord in both situations.

Seven: Take Steps to Protect Your Second-Home Investment

Whether you're buying a second home as a pure investment, for a weekend getaway, or as a place to enjoy your retirement, it's an investment all the same. And a large one, at that. Protecting your investment starts before you buy and continues long afterwards. For example, you'll want to get a proper home inspection prior to purchasing the property, so as to deal with some repair issues up front and get a sense of what repairs may be looming. You may want to purchase title insurance in case past claims on the property surface after the purchase. And, your lender will require that you carry homeowners' insurance, to protect your property against damage from such causes as theft, fire, flooding, or windstorms. Taking these protective steps will guard not only your home, but your peace of mind.