With home prices still falling, there has never been a better time to buy a second home for those who can afford to take the plunge. Today, we offer some advice on a few things you should know before you go jumping into any deal.
If you’ve been dreaming of owning a vacation home, know that this is the best time in years to make your move. In many popular vacation spots, house prices are at five year lows. For example, the latest figures from Fiserv show that in Napa Valley, California, property prices are down some 47% from what they were in 2006, while in Ocean City, NJ, they are 24% less than the prices of five years ago.
However, while some of the harder hit markets like Miami and Las Vegas may well fall a little bit further, most observers agree that the biggest price drops are well behind us, which means now is the time to act.
Be aware though, of how the loan rate works. Many people buy a second home with the intention of renting it out for part of the year, in order to recoup some of the money. While this is a good idea, many lenders treat rented second homes as investment properties, which means you’ll be faced with paying up to 25% of the value as a down payment, and as much as 1% higher interest on mortgage payments than you would if you were buying a primary home.
You also shouldn’t count on the rent to pay all of your bills either. According to Christine Karpinski of the HomeAway.com vacation/rental site, on average most holiday homes are only rented out for about 17 weeks of the year. The rest of the time they sit empty. Also, you will still need to pay for maintenance, insurance, cleaning etc., so bear this in mind too.
However, smart second home owners could be entitled to some sweet tax benefits. If you only rent your home out for two weeks or less, then you don’t have to report this income to the Inland Revenue – while you are still allowed to deduct mortgage interest and property taxes.
And if you stay at the home for less than 2 weeks, or for just 10% of the rental days, whatever is greatest, you will be allowed to deduct operating costs too, which includes cleaning bills and maintenance, in addition to the property taxes and interest over this period.
So, now is the time to act, but make sure you know how you intend to use the home, and speak to your tax guy before you buy!