This Could Be Your Last Chance For A Second Home
by Joe Mont on Jan 31, 2012, 1:04 PM
Snowbirds looking for leisurely living in sunnier climates are providing a bright spot for the battered housing market.
Each March, the National Association of Realtors assesses the previous year’s trends regarding vacation- and investment-home sales. In 2010, those purchases held steady from a year earlier: 10% and 17%, respectively, of transactions.
The news may be getting better for those looking to sell or broker second homes. With millions of baby boomers preparing to retire, real estate professionals are optimistic vacation and rental properties will be in even greater demand for the next several years.NAR’s analysis of U.S. Census Bureau data show there are 7.9 million vacation homes and 41.6 million investment units in the U.S., compared with 74.8 million owner-occupied homes.
NAR also sees good news in that 40.7 million people in the U.S. are between the ages of 50-59 — a group that dominated sales in the first part of the past decade and established records for second-home sales. An additional 43.8 million people are in the primary buying demographic of 40-49 years old, while another 40.4 million are 30-39.
“Even if purchases are delayed due to economic circumstances, the underlying long-term demand — the desire for purchasing second homes — remains because people in their 30s and 40s will reach the prime age for buying and will drive the second-home market in coming decades as conditions permit,” NAR Chief Economist Lawrence Yun says.
According to NAR, the typical vacation-home buyer in 2010 was 49 years old and had a median household income of $99,500; investment-home buyers had a median age of 45 and earned an average $87,600. All-cash purchases have become prevalent in the second-home market in recent years: 59% of investment buyers paid cash in 2010, as did 36% of vacation-home buyers.
“An interesting trend is showing that people are planning to eventually occupy their vacation homes,” says Jennifer DuBois, director of Realtor.com. “Thirty-four percent say they plan to use the property as a primary home in the future. So it’s almost like you are buying their retirement home now.”
In 2010, 34% of vacation-home buyers said they plan to use the property as a primary home in the future, as did 10% of investment buyers, according to NAR.
For those near-retirees looking to buy a secondary home, there are a few things to consider:
First, make sure you want to invest in a particular city or town. Don’t just base your decision on how an area fits with your interests — sun and swimming, peaceful hiking trails or mountainous ski slopes — make sure you visit and you can get on board with the investment. Also, make sure you will be able to visit often enough to make the investment worthwhile.
The next crucial step is to estimate what the new home will cost.
According to NAR, the median vacation-home price was $150,000 in 2010, down 11.2% from $169,000 in 2009, while the median investment-home price was $94,000, 10.5% below the $105,000 median in 2009. By contrast, the median primary home price declined just 4.5%, to $176,700, last year from $185,000 in 2009.
Smart buyers — willing to engage in some research — may be able to sniff out even better deals.
Second-homebuyers purchased more distressed homes at discounts than buyers of primary residences, according to NAR. Foreclosure or trustee sales accounted for 17% of investment purchases and 11% of vacation-home sales in 2010, compared with 5% of primary purchases.
Those bargains may not last forever, however. Many of the warm-weather regions popular with vacation home buyers are seeing a recovery.
Ten of the nation’s local real estate markets that suffered from high foreclosure rates in recent years, eight of which are in Florida, are leading America’s housing sector toward a general recovery, according to a Realtor.com report on top “turnaround towns” issued this week.
Among the rebounding communities, based on an increase in median sales price and reduction of existing inventory, were the Florida cities of Miami, Orlando, Sarasota, Naples, Fort Myers-Cape Coral, Punta Gorda and Lakeland-Winter Haven. Also making the list were Phoenix, Ariz., and Boise, Idaho, the former being a destination for retirees seeking dry air and golf courses.
“This is the time of year where older people are often thinking about moving to Florida,” DuBois says. “If you have the money and can get the mortgage, interest rates have never been lower … there are some good opportunities. We’re not at peak prices the way we were in 2007, and if you can afford it it’s a good time to buy.”
Vacation-homebuyers need to decide whether they wish to subsidize their purchase by renting it out when they are not using it.
DuBois makes a pitch for searching out a local real estate agent to help determine the best approach for renting out a home.
“You want to have a local expert on the ground,” she says. “You want to make sure that you are aware of any trends that might be happening. A local Realtor can tell you what the average rental is for that level of property based on whether you have a one-bedroom or two-bedroom and, perhaps, even based on the furnishings. You might be somebody who wants to appeal more to families or singles or more to couples. A Realtor can tell you which is more advantageous in the local market.”
An alternative is offered by T.J. Mahony, CEO and co-founder of FlipKey, an online vacation rental marketplace.
“Of the folks who have a vacation home, the average person will leave it vacant about 90% of the year,” he says. “So they have a beautiful piece of property and nine out of 10 days there is nobody in it. There is obviously a large opportunity to utilize that space better. What we find though is that a very small minority of second-homebuyers actually rent it out to a guest, and when they do it is actually quite profitable.”
He says the average FlipKey user earns about $26,000 a year renting out their secondary home.
Mahony says the “No. 1 holdup” preventing more people from renting their homes is concern over having guests they don’t know and the threat of damage or theft. He counters those concerns with a survey of his membership that found 94% had either never had an incident, or just a single, minor one.
“People just have to look at their own finances and make sure they are ready for that commitment, because you are doubling your mortgage payments and increasing your taxes,” DuBois further advises those looking at a second home. “Be aware if you are going to buy into a community that has [a homeowners association] fee and make sure you realize all the hidden expenses. As far as maintenance goes, is a property manager the right person to go to? Do you want to go to a gated community or someplace that takes care of the outdoor maintenance, or is that something else you are going to be responsible for yourself? The average distance is about six hours away, so that is a plane ride. It will be a substantial commitment.”
Taxes also get more complicated and will likely be influenced by how much time you spend under your new roof.
The following tax tips for vacation-homeowners were offered by TurboTax(INTU):
If you use the property as a second home rather than renting it out, interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home (at least until Congress decides whether to eliminate or modify all such deductions). You can write off 100% of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties.
You can deduct property taxes on your second home. Unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own.
If you rent the property for 14 or fewer days during the year, you can pocket the rental income tax free. The house is considered a personal residence, so you deduct mortgage interest and property taxes under the standard rules for a second home.
If the home is rented out more than 14 days, all rental income must be reported. Rental expenses are deductible, but proper documentation is needed to differentiate between the time the property is lived in versus rented. If you use the property more than 14 days, or more than 10% of the number of days it is rented, whichever is more, it is considered a personal residence and the rental loss can’t be deducted.
If you limit personal use to 14 days or 10%, the vacation home is considered a rental property and up to $25,000 in losses (for example, maintenance costs) may be deductible each year.