Owning a Second Home or Investment Property
For various reasons, the
idea of
owning a second home or investing in property is on many people's minds
nowadays. Some dream of having a second home in a more moderate climate.
Others, wishing to diversify their investments, are considering real estate
because of continued record low mortgage interest rates. If you're interested
in the idea, but not sure how to get started, we've assembled some helpful
information.
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Second Home
or Investment Property?
The process will be simpler
and smoother if you can make some decisions about your lifestyle, needs, and
plans for the property at the beginning. Generally, if you're looking for a
place to spend the winters for several months at a time or to take frequent
weekend getaways, then you're most likely considering the purchase of a second
home. However, if you're looking to generate income or diversify your
investments, then you're looking to purchase investment property. Check our web
site later this month for more information regarding investment property and
how to be a landlord. The information below pertains primarily to buying a
second home. In either case, you're entitled to different types of tax
deductions depending on how you treat the property.
Criteria
The criteria defining a
second home are fairly loose. A second home doesn't necessarily mean a "house."
It could be a condominium, a recreational vehicle, or
even a boat. Basically, for your second property to be considered
a second home by the IRS, it needs to have sleeping accommodations and
cooking and toilet facilities. A second home qualifies for the home mortgage
interest deduction, just like your primary residence, because you're using the
home for personal purposes during the year. Many folks have second homes that
are part rental. The catch is that your personal use needs to exceed 14 days or
10 percent of the time it was rented, whichever time length is greater. In
addition, if you rent your home for fewer than 15 days a year, and personally
use it for more than 15 days a year, you do not need to declare any rental
income. Everyone's circumstances are unique. Consult a tax professional
regarding deductibility.
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Looking Around
Do you want to buy a second
home in your favorite vacation area, or a weekend spot not more than a few hours' drive away,
but don't know what the market's like? You might want to do some research on
the web using Realtor.com or
visiting the web sites of the individual real estate companies in the area
where you wish to purchase a property. Some real estate-related web sites allow
you to tailor your search you select such as price, number of bedrooms/baths,
type of home, or location sorted by zip code. If you're considering this home
to be your future retirement home, then you also should consider additional
factors such as the annual climate. Weather.com allows you to view monthly
climatic averages for cities around the country. You also might look for
information and articles discussing cost of living or "best places to live for
retirees" from groups such as the AARP.
The Transaction
You'll probably want to
work with a local realtor to help with the transaction, especially if you're
considering an out-of-state purchase. A knowledgeable realtor should be aware
of important factors that could affect your decision. For instance, if the
locale you're considering has development restrictions, like those involved
with historic districts where strict design, remodeling, or building codes may
be enforced. In addition, the agent will do much of the legwork for you and
ensure that all the bases are covered during the transaction. Just as you did
when you purchased your primary residence, you should still have the property
inspected. Take the effort to know your
rights.
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Additional Responsibilities
Remember, owning a second
home is just that-with all the associated responsibilities and expenses that it
brings. Check individual state
web sites for property taxes. How much maintenance are you willing to
take on? If you're not willing to take on a lot of extra maintenance and yard
work, consider buying a condo and hiring a property management company. Of
course you'll need insurance. In some areas, you may be surprised by the rates
you'll need to pay for homeowners
insurance. Coastal areas usually have higher premiums due to hurricane
risk, and you may need to buy a separate flood insurance policy as
well.
Financing
Just as you did when you
bought your primary residence, be sure to have your financial affairs in order
before you even begin looking. Get a copy of your credit
report and be sure there are no errors, which could delay or hurt your
financing
options. Also, be prepared to meet some stricter criteria to get the loan. This
is because your finances will be stretched more thinly once you take on that
second mortgage.
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Other Resources
This is just a brief
overview. For more information check out these resources: Read these publications online or
order them:
Websites*:
* Names of resources and
organizations included in this online article are provided as examples only,
and their inclusion does not mean that they are endorsed by the Savvy Consumer
Information Center or any Government agency. Also, if a particular
resource or organization is not mentioned, this does not mean or imply that it
is unsatisfactory.
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