Here are 6 factors you need to consider when investing in a second home.
While winter’s chill is in the air, spring is months away and vacation-home shoppers are itching to find their slice of paradise. I want to help you understand the differences in making this type of purchase versus a primary residence. Here are six key criteria to assess vacation choices, whether for personal use or an investment.
1. Keep costs within the budget. Advise buyers to qualify for a loan before looking, unless they pay all cash, says sales associate Nichi Dunphy with Better Homes & Gardens Real Estate, Gary Greene, in Galveston, Texas. Then, help clients understand how much discretionary income they’ll need, says Edward Kohlhepp, president of Kohlhepp Investment Advisors in Doylestown, Pa. For example, they’ll need at least $30,000 annually to afford a $500,000 home comfortably, he says. Why so much? To cover the monthly mortgage, real estate taxes, assessments, regular maintenance, homeowners’ insurance, flood insurance, furnishings, a caretaker to watch the property if the owners don’t live nearby, an emergency fund for disasters and major repairs, and travel costs. Also critical, he says, is that buyers not use retirement funds to fund the home; there’s never a guarantee they’ll recoup their money by renting out the property to vacationers.
The good news, however, is that vacation homes come in many sizes and types — houses as big as the swanky Hamptons, N.Y., beach home in the movie “Something’s Gotta Give,” to itsy-bitsy mobile cottages like Escape, which measure under 400 square feet, are energy-efficient and can be set up in a day.
2. Determine the frequency of use. The amount of time your clients will spend in their vacation home depends on the individual and family and the investment and rental potential. Some think they need to go every weekend to justify the expenses, while others are fine just visiting in summer or winter. Distance will play a factor for your clients. “Driving one to two hours from Houston to Galveston is easy, but from Dallas that can mean five hours,” Dunphy says. Some clients may also hope their grown children and grandkids will visit for multigenerational gatherings, so you’ll want to work with them on finding the best second-home location to make that practical.
3. Pick the right location. What makes one vacation locale more appealing to buyers than another largely depends on the clients’ interests. In Sonoma, Calif.’s wine country, a typical buyer’s wish list includes a departure from the urban life that many commute from, along with mountain or vineyard views and room for guests, says Gerrett Snedaker, CRB, senior vice president of North Bay Wine Country Group, Better Homes & Gardens Real Estate, Sonoma. While in Benton Harbor, Mich., there are multiple attractions of water, beaches, an 18-hole, PGA-quality golf course, wine trail, and proximity to many cities such as Detroit, Chicago, and Indianapolis, says Kerry Wright, a broker with Harbor Shores.
4. Understand upkeep. A big lawn needs mowing, lots of square footage means more cleaning, a pool requires maintenance — make sure your clients have a realistic picture of the upkeep a property will require. “I’m definitely hearing buyers think more about care. They’ll say, ‘This siding has to be painted every few years, while vinyl wouldn’t,’” Dunphy says. Some communities like Harbor Shores are trying to remove some of the burden by offering landscape services through its homeowners’ association and by developing smaller, more efficient homes and condos, says Wright.
5. Research rental potential and costs. If income is the prime motivation, buyers should know that demand and dollars fluctuate with the economy, weather, location, number of bedrooms and bathrooms, and amenities. Buyers need to remove emotion from their purchase choice and pick what appeals to the widest target market rather than what they want for themselves, says Heather Bayer, a blogger with Vacationhomerentals.com. “In Orlando, even if close to the Disney amusement parks, a house should have a pool and southern exposure and be large enough to accommodate a family,” she says. Buyers also need to know whether their homeowners’ association permits renting out a property, what their own comfort level is about having children or pets in tow, and whether they’ll need to split proceeds with a rental service or property manager — sometimes by as much as 50 percent of the take. They’ll also need renter’s insurance.
6. Think about resale and changing needs. Help potential home owners research sales, prices, and trends. Condos, which have seen their popularity rise and fall in Galveston, are desirable once again, and the city now benefits from the proximity of Houston, which has become one of the country’s hottest markets. “We have 48,000 living here year round, but that swells to more than 100,000 in summer,” Dunphy says. Family needs also change. Little kids may willingly head out with parents but teenagers less so, and multigenerational families often require more space.
Contact me anytime with your questions.