Is sec­ond home a dream or a night­mare?

Baltimore Sun Sunday - - REAL ESTATE - By Natalie Camp­isi

Sec­ond homes give peo­ple the chance to live an­other lifestyle, in an­other part of the coun­try or even out­side the United States. For some, it’s ap­peal­ing enough to get an­other mort­gage or in­vest a sub­stan­tial amount of sav­ings to buy one.

If you’re pin­ing for a home away from home, you’re not alone. There were 7.4 mil­lion sec­ond homes in 2016, or about 5.6% of the to­tal hous­ing stock, ac­cord­ing to a re­port from the Na­tional As­so­ci­a­tion of Home Builders. The most pop­u­lar place for a sec­ond home is Florida (1.1 mil­lion). Cal­i­for­nia, New York, Texas, Michi­gan, North Carolina, Ari­zona and Penn­syl­va­nia are also pop­u­lar states for sec­ond homes.

But be­fore you join the club, make sure you’re pre­pared for the long-term re­spon­si­bil­i­ties a sec­ond home comes with.

Con­sider the full fi­nan­cial im­pact.

As a (sec­ond-home) homeowner, all the fi­nan­cial re­spon­si­bil­ity falls on your shoul­ders — twice. If you have a sewer pipe prob­lem in your main res­i­dence and then, a short time later, your HVAC sys­tem needs re­pair in your sec­ond home, you’ll have two whop­ping, back-to­back bills.

Ad­di­tion­ally, you’ll have dou­ble the bills for home in­surance, taxes and var­i­ous other ex­penses like util­ity bills, lawn main­te­nance and home­own­ers as­so­ci­a­tion, or HOA fees (when ap­pli­ca­ble).

“It’s very im­por­tant that buy­ers write out a de­tailed bud­get, tak­ing into ac­count con­tin­gent ex­penses — for ex­am­ple, will flood in­surance be re­quired and what is that cost? Are the ap­pli­ances go­ing to need to be re­placed soon?” says Charles Nilsen, na­tional di­rec­tor of pri­vate client lend­ing at Bos­ton Pri­vate.

Al­though home­buy­ers might be able to af­ford th­ese costs, keep your big­pic­ture goals in sight, says Daniel R. Hill, pres­i­dent of in­vest­ment ad­vi­sory firm D.R. Hill Wealth Strate­gies LLC, in Richmond, Vir­ginia.

Hill en­cour­ages his clients to con­sider th­ese big­money is­sues be­fore jump­ing into an­other home:

Are you sav­ing at least 15% of your cur­rent in­come for re­tire­ment? Do you have at least six months in an emer­gency cash fund read­ily avail­able? Are you out of credit card debt? Is your cur­rent home paid off?

And, if ap­pli­ca­ble, have you es­tab­lished a col­lege fund for your chil­dren?

If all of th­ese boxes can be checked, then buy­ers are likely in a safe po­si­tion to con­sider a vacation home, Hill says. Your abil­ity to travel to other des­ti­na­tions might be squeezed.

The old say­ing “fa­mil­iar­ity breeds con­tempt” can be ap­plied to vacation homes, for some folks.

Af­ter 10 sum­mers in Clear­wa­ter Beach, the ap­peal of warm Gulf wa­ters might give way to the an­noy­ance (and cost) of hur­ri­cane sea­son. Like­wise, a 10-hour scenic drive to a moun­tain cabin can quickly trans­form into a bur­den­some schlep af­ter a few years.

The point is: Do you want to get stuck in one place for the long term?

“Buy­ers should con­sider whether the sec­ond home will com­pro­mise their abil­ity to travel to other places. If the in­di­vid­ual or fam­ily en­joys trav­el­ing to the same lo­ca­tion each year, pur­chas­ing a home there may make sense, but it may be chal­leng­ing to jug­gle the ex­penses of a sec­ond home with trips to other lo­cales,” says Nilsen.

Rent­ing out your sec­ond home

Col­lect­ing rent money can be a smart way to sub­si­dize your vacation prop­erty. How­ever, there are laws that you should be aware of be­fore you buy. Keep in mind, laws vary by state, city and even neigh­bor­hood — so what’s good for one com­mu­nity, might not be al­lowed in an­other.

For ex­am­ple, in New York City, Airbnb is il­le­gal un­less the per­ma­nent res­i­dent is liv­ing in the apart­ment or the apart­ment is be­ing rented out for more than 30 days. For con­do­mini­ums, buy­ers should find out if the condo by­laws al­low for renters or Airbn­blike rentals. The same goes for HOA rules.

“Some com­mu­ni­ties re­quire a min­i­mum of 90-day rentals with prior as­so­ci­a­tion ap­proval of the renter. If that’s the case, buy­ers will want to as­sess whether find­ing qual­i­fied renters will re­quire a Real­tor and cal­cu­late the com­mis­sions that will need to be de­ducted,” Nilsen says.

Clean­ing ser­vices, in­surance and gen­eral main­te­nance are costs land­lords should in­clude in their bud­get, as well. Since you can’t guar­an­tee rental in­come, make sure you can af­ford th­ese costs (in­clud­ing a monthly mort­gage pay­ment) on your own.

You might also have to forgo your de­sired time to be in your sec­ond home, in or­der to get rental in­come, which could di­min­ish the ap­peal of a sec­ond home.

Taxes on vacation homes

Ac­cord­ing to the IRS, a vacation home is clas­si­fied as ei­ther a per­sonal res­i­dence or a rental prop­erty. It’s a per­sonal res­i­dence if you limit rent­ing it out to 14 days or fewer per year; more than 14 days and it’s con­sid­ered rental prop­erty. In most cases, you’ll have to re­port rental in­come re­gard­less of the clas­si­fi­ca­tion.

If your vacation home is clas­si­fied as a rental prop­erty, you won’t be able to claim the mort­gage in­ter­est tax de­duc­tion. How­ever, you can claim losses on your rental if the amount you spend ex­ceeds your rental in­come. You can re­port th­ese losses on Sched­ule E of your Form 1040.

Be sure to talk to an ex­pe­ri­enced tax pro­fes­sional about your po­ten­tial li­a­bil­i­ties and de­duc­tions. And keep in mind you can only deduct in­ter­est paid on mort­gages of $750,000 or less to­tal of all your homes.

Sec­ond homes can be a dicey in­vest­ment.

Any­one who re­mem­bers the hous­ing crisis knows that home val­ues are not guar­an­teed. Af­ter the hous­ing mar­ket peaked in 2006, val­ues plum­meted by 33% na­tion­ally, wip­ing out eq­uity and forc­ing home­own­ers into fore­clo­sure.

Many ex­perts agree that res­i­den­tial real es­tate is not nec­es­sar­ily the best way to in­vest money, so for folks who want to build wealth buy­ing an­other home might not be fer­tile ground.

“Many peo­ple mis­tak­enly be­lieve that real es­tate is a good and safe in­vest­ment,” says Robert R. John­son, pro­fes­sor of fi­nance, Hei­der Col­lege of Busi­ness, Creighton Univer­sity. “They fall prey to sto­ries of real es­tate val­ues ris­ing dra­mat­i­cally over long pe­ri­ods of time. What they don’t re­al­ize is that from 1890 to 1990 the in­fla­tion­ad­justed ap­pre­ci­a­tion in U.S. hous­ing was just about zero. That amazes peo­ple, but it shouldn’t be so amaz­ing be­cause the cost of con­struc­tion and la­bor has been go­ing down.”

DREAMSTIME

From taxes to rent­ing it out, there are some im­por­tant real-life con­sid­er­a­tions to weigh be­fore buy­ing that dream-life vacation home.

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