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During the Real Estate Freeze, Vacation
Homes Might Be a Warm Spot
Many of us have taken a vacation and found an idyllic spot
where we'd love to retire, spend the weekend or telecommute.
Some people have actually bought property spontaneously while on
vacation — and while that's not always a horrible idea, it is
better to have a strategy.
Finding a relative bargain on vacation property involves
research and a solid knowledge of your own finances. It involves
knowing something about the market, too. Some thoughts:
Who else is buying? Any real estate purchase involves
a market analysis. Don't assume that just because the
residential market's in trouble that vacation real estate
necessarily follows where you're looking. Keep in mind that in
some areas of the country foreign buyers are a factor
thanks to our wheezing dollar. If you like the area and the
property, talk to real estate agents, residents and other people
who know the town well to see if you can be ahead of the curve
in making a purchase.
Know where your money's coming from. There are plenty
of people who finance second homes out of the equity from their
first home, but given today's slow real estate market, it's a
risky option. Before you even start looking for a property,
think about what a second home purchase will do to your overall
financial picture. First determine the impact on your long-term
financial plan. Will you still be able to retire at the same
age? Will you have enough money to educate the kids? Then look
at your lending options. Many lenders require buyers to put down
at least 20 percent on a second home. Keep in mind that your
primary home lender may not want to tackle a vacation home
mortgage. While you're planning, clean up your credit first,
shop your lending options and get pre-approved first. Above all,
get some advice from an expert like a Certified Financial
Planner™ professional.
Understand what you're buying. Even if you haven't
pinpointed a specific home or condo, you need to understand all
the cost and environmental issues of owning property in that
community. You need to know appreciation rates on similar
properties and if there are plenty of sale signs nearby (do
people want out?). You need to know about all the potential
environmental risks to your property from hurricanes to mold.
Plan for upkeep. An unattended structure is subject to
crime as well as wear and tear that can accelerate when owners
aren't present daily. Talk to your insurance agent about
insuring out-of-town property. Also, while there are often
qualified paid caretakers in vacation communities to help
protect and maintain your property, they can be expensive and
you need to make sure they're bonded. Think of anything terrible
that can happen to a property and then plan solutions — before
you buy. And don't forget the cost of utilities, telephone,
cable, property taxes, etc. All these upkeep costs often add up
to a surprising amount.
Is it a fixer-upper? Keep in mind that in some resort
or vacation areas, property may be landmarked or otherwise
legally protected even if it looks like it's falling down.
Before you become convinced you've snagged a bargain and you're
dialing a contractor, check with local real estate agents and
City Hall to investigate all the possible protections and
restrictions on the property you're examining.
Are you going to rent or occupy? Renting out a
vacation home is a good way to cover some of the cost, but
lenders often factor in a 25 percent vacancy rate when
determining your qualification for the loan. Plus, you have to
play landlord with people you may never meet, and that can be
risky. Rental property is a business, so treat it as such.
Talk with your tax advisor. Vacation homes may or may
not offer some tax benefits to you depending on your overall tax
situation. Ask your tax advisor to run the numbers for you. But
don't make the move for tax reasons alone. If your dream
vacation home fits into your financial plan and life and you've
done your research, it may be time to buy.
March 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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