Buying a Second Home

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Buying a Second Home

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Buying a Second Home

A real-estate essential

, 2nd Edition

If you're in the market for a second home, but don't have money to burn, turn to Buying a Second Home. Explore topics including:

  • how to rent your property profitably
  • choosing the right mortgage for you
  • buying a home in foreclosure

Includes all the legal forms you need!

Second-home hunting has never been easier with everything you need to find and buy the right place at the best price!

You don't have to be rich to buy a second home -- but you do need to be smart. Buying a Second Home delivers the goods, showing you how to make the purchase of your second home a success!

You'll learn how to identify an affordable price range, choose a great location, get low-cost financing, minimize taxes and more. Explore topics you won't find in other home-buying books, including:

  • innovative financing strategies
  • how to rent your property profitably
  • how to assess the investment potential of a fixer-upper
  • choosing the right mortgage for you
  • profiting from a second-home sale
  • buying a home in foreclosure

This all-in-one guide includes handy checklists and custom worksheets that help you make sense of the entire process, from buying to ownership.

The new 2nd edition includes updated market and mortgage information, including the latest criteria you'll need to meet in order to get a loan and how to assess the potential of a recently foreclosed home. Get the step-by-step information you need to be smart about your investment with Buying a Second Home.

ISBN
9781413309256
Number of Pages
408
Included Forms
  • HUD-1 Settlement Statement
  • Affordable Monthly Expenditures Worksheet
  • Estimated Maximum Loan Amount Worksheet
  • Maximum Purchase Price Worksheet
  • Initial Walk-Through Check List
  • Rental Property
  • Annual Pre-Tax Cash Flow Worksheet
  • Return on Investment (ROI) Worksheet
  • Real Estate Agent Interview Questionnaire
  • Mortgage Broker Interview Questionnaire
  • Attorney Interview Questionnaire
  • Home Inspector Interview Questionnaire
  • Fixer-Upper State-of-Mind Quiz
  • Fixer-Upper Walk-Through Checklist
  • Fixer-Upper Cost-Tracking Form
  • Annual Nonessential Expenditures Adjustment Worksheet
  • Borrowing Against Home Equity: Comparison Worksheet
  • Sample Promissory Note
  • Sample Mortgage
  • Sample Deed of Trust
  • Property Management Company Interview Questionnaire
  • Craig Venezia

    Craig Venezia is a nationally recognized authority on private mortgages. He has appeared on CNN/Money's "Open House" and been quoted by major media including the New York Times, Los Angeles Times, Chicago Tribune and National Public Radio. Formerly, Mr. Venezia served as an executive at Wells Fargo Bank and was affiliated with E*TRADE Financial. He has also worked as a senior executive specializing in private mortgages at a financial services company. He resides in Massachusetts with his wife and three children.

1. The Seven Rules of Buying a Second Home

  • What's Your Main Reason for Buying a Second Home?
  • Seven Steps Toward a Successful Second-Home Purchase

2. What a Second Home Really Costs

  • Initial Costs to Buy the House
  • Ongoing Ownership Costs

3. Crunching the Numbers: How Much Second Home Can You Afford?

  • Don't Let Your Down Payment Dictate Your Budget
  • How Much Money Comes in Each Month
  • Where Your Money Currently Goes Each Month
  • How Much is Left for Your Second Home Each Month
  • How Much to Set Aside for Non-Mortgage Second-Home Expenses
  • How Much You Can Spend on Your Second-Home Mortgage
  • How Much You Can Pay for Your Second Home Overall
  • How to Adjust Your Budget Around a More Expensive House

4. Narrowing Your Search: What and Where to Buy

  • Reviewing Your House-Type Options
  • Choosing a House Type: Price, Privacy, and Property Maintenance Needs
  • Comparing House Types Using the P Factor
  • New Build or Existing Home?
  • Starting Your Search for a House Location
  • Choosing a Location to Invest In
  • Choosing a Location for Your Vacation House
  • Choosing a Location for Your Retirement

5. Picking the Right House

  • Evaluating the House's Physical Condition
  • Adding Contingencies to Your Purchase Offer
  • House-Hunting Considerations for Investors
  • House-Hunting Considerations for Vacationers
  • House-Hunting Considerations for Future Retirees
  • Choosing a House That's a Good Investment

6. How Experts Can Save You Time and Money

  • Working With Real Estate Agents and Brokers
  • Working With Mortgage Brokers and Bankers
  • Working With Real Estate Attorneys
  • Working With Home Appraisers
  • Working With Home Inspectors
  • Working With Closing Agents
  • Bringing in Financial and Estate Planners
  • Bringing in a Tax Professional

7. Fixer-Uppers: Finding the Gems and Avoiding the Junk

  • Are Fixer-Uppers a Good Deal?
  • Are you Ready for Months of Chaos?
  • Planning for Tenants? No Need for a Luxury Fix-up
  • How Much Time and Money Will Different Repairs Require?
  • Doing Walk-Throughs
  • Making Your Purchase Offer
  • Getting a Second Opinion From a Professional Home inspector
  • Soliciting a Formal Estimate From a Contractor
  • How Will You Pay for Repairs?
  • Who Will Do the Repair Work?
  • Keeping Track of Costs

8. Buying Straight from the Seller: FSBOs

  • Why Some Sellers Go Without a Real Estate Agent
  • Watch for Inconsistent Pricing of FSBOs
  • Dealing With FSBO Sellers
  • Enlisting Your Real Estate Agent's Help
  • Finding FSBO Houses

9. Raising the Cash You'll Need Up Front

  • Building Your Savings
  • Borrowing What You Can't Save

10. How Family and Friends Can Help (and Why They'll Even Want To)

  • What is a Private Home Loan?
  • How Private Home Financing Helps the Family as a Whole
  • How a Private Home Loan Helps You, the Borrower
  • How Making a Private Home Loan Helps Your Relative or Friend, the Lender
  • Your Family and Friends Don't Need to Be Rich
  • Combining Private Loans With Other Loans
  • Choosing Your Own interest Rate
  • Choosing People to Ask for a Loan
  • Requesting the Loan
  • Preparing the Loan Paperwork
  • After You Receive the Loan

11. Finding Your Way Through the Mortgage Maze

  • Unique Features of Second-Home Mortgages
  • Mortgage Basics: A Refresher Course
  • How Conforming Loans Can Lower Your Interest Rate
  • Got a High Credit Score? Get a Low Interest Rate
  • Where to Start Shopping for a Mortgage

12. You Don't Have to Go It Alone: Buying With Others

  • The Pros and Cons of a Shared Purchase
  • Finding a Shared-Purchase Partner
  • How to Determine Cobuyer Compatibility
  • Co-Ownership Options for Holding Title
  • Co-Ownership Agreements
  • Whether to Form a Separate Business Entity Before Buying

13. Being a Landlord: What You Need to Know

  • Should You Be a Landlord?
  • Is Your Home Appropriate for a Long- or Short-Term Rental?
  • Long-Term Rentals: What You Need to Know
  • Seasonal or Short-Term Rentals: What You Need to Know
  • Manage your Property Without Breaking Your Back or Your Wallet
  • Protecting your Home, Your Stuff, and Yourself

14. Tax-Saving Strategies

  • Types of Taxes Second-Home Owners Pay
  • How Deductions Can Lower Your Taxes
  • Basic Home-Related Deductions: Mortgage Interest, Points, and Property Taxes
  • Additional Deductions If You Rent Out Your Property
  • How to Minimize Capital Gains Taxes If You Sell

APPENDIX A -- How to Use the CD-ROM

APPENDIX B -- Forms and Checklists

Forms for Calculating Costs and Affordability
  • Hud-1 Settlement Statement
  • Affordable Monthly Expenditures Worksheet
  • Estimated Maximum Loan Amount Worksheet
  • Maximum Purchase Price Worksheet
Forms for Evaluating Individual Houses
  • Initial Walk-Through Checklist
  • Rental Property Annual Pretax Cash Flow Worksheet
  • Return on Investment (ROI) Worksheet
Forms for Interviewing Professionals
  • Real Estate Agent Interview Questionnaire
  • Mortgage Broker Interview Questionnaire
  • Attorney Interview Questionnaire
  • Home Inspector Interview Questionnaire
Forms for Evaluating Fixer-Uppers
  • Fixer-Upper State-of-Mind Quiz
  • Fixer-Upper Walk-Through Checklist
  • Fixer-Upper Cost-Tracking Form
Forms to Facilitate Down Payment and Other Informal Loans
  • Annual Nonessential Expenditures Adjustment Worksheet
  • Borrowing Against Home Equity: Comparison Worksheet
  • Promissory Note
Form for Choosing Management Company
Property Management Company Interview Questionnaire

INDEX

Chapter 1
The Seven Rules of Buying a Second Home

 

One out of every three homes in the United States today was bought as a second 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 meets your needs, to ways to stay within your budget, to a crash course in being a landlord. It includes 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 it will 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, home-value appreciation, or both

• 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 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 evaluate and learn what’s unique about your home-buying needs, and we’ll give you specific advice based on your goals.

Curious About Your Fellow Second-Home Buyers?

According to the 2008 Investment and Vacation Home Buyers Survey from the National Association of Realtors®:

•   The typical vacation-home owner is 46 years old and earns $99,100.

•   The typical investment-home owner is 42 years old and earns $92,900.

•   Most second-home owners are married—81% of vacation-home owners and 76% of investment-home owners.

•   Minorities are playing an increasing role in the second-home marketing, accounting for 15% of vacation-home purchases and 19% of investment-home purchases.

•   Vacation-home owners are buying farther away form their primary residences than investment-home owners, 287 miles (median) versus 27 miles (median) respectively.

 

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.

Are You a Tortoise or a Hare Investor?

In the childhood story, “The Tortoise and the Hare,” slow and steady always wins out over fast and furious. In real estate investing, both approaches can win—but you’ll probably want to stick to one or the other, depending on your level of patience and willingness to take risks.

•   A tortoise will purchase a second home with the idea of holding onto it over a long period of time: ten, 20, even 30 years. Tortoises aren’t looking to make a quick buck. Their strategy is to weather the ups and downs of the real estate market and profit through long-term rises in home values. Tortoises often also rent out their property, ideally to achieve monthly profits, but at a minimum to offset expenses.

•   A hare will purchase a second home with the idea of reselling it as soon as a reasonable profit can be gained. This is commonly referred to as “flipping” a property. Hare investors often try to add value to the property by fixing it up, preferably with low-cost cosmetic changes. Hares want to see house values increase sharply over a short period of time. While some hares may rent out their properties, most don’t, because that would get in the way of a quick sale.

It doesn’t matter whether you’re a tortoise or a hare, so long as you recognize your tendencies and make well-researched decisions around them. You can also change in midrace. For example, during the housing boom that started in the mid- to late 1990s, many tortoises sold their properties after holding onto them for only a few years, because house values had increased so fast and furiously. Conversely, when house values flattened, and even dipped, in the mid-2000s, many hares decided to hold onto their properties longer than anticipated, because they weren’t achieving the desired profits.

 

 

investor

If you’re an investor, pay special attention to this symbol. It will alert you to advice and tips tailored to people with your home-buying goals.

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.

 

caution

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.

 

vacationer

If you’re a vacationer, pay special attention to this symbol. It will alert you to advice and tips tailored to people with your home-buying goals.

Future Retirement

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.”

 

future retiree

If you’re a future retiree, pay special attention to this symbol. It will alert you to advice and tips tailored to people with your home-buying goals.

Mixed Reasons

Of course, you may have a mix of motivations. Perhaps you want the home primarily for vacationing, 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 6,000 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 time, 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 to make sure you pick a location that meets your goals. 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

Taxes on your second home come in all shapes and sizes, yet have one thing in common—they can be a burden. However, with some advance planning, you can save thousands of dollars a year in taxes. For example, sometimes buying a home just outside 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 deducations 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 may help you defer paying capital gains tax.

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

Most people pay for their homes 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. But 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 finance the rest of the purchase. And while the government and financial institutions alike are cracking down on some of the more risky loan products, there’s still enough out there to make anyone’s head spin. 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

One unique way to help finance your second home is to tap the “Bank of Family and Friends.” And it’s a win-win, because your friend or family member can earn the tens of thousands of dollars in interest you’ll pay over the life of your mortgage loan that would otherwise go to an institutional lender. I’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 together. 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, to deal with repairs up front or at least know 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.

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