In many resort markets, vacation rental rates are up again this year. However, interest rates are still low and real estate is once again appreciating. Is this the year to stop renting and buy a vacation home?
You’re not alone if you are thinking about shopping for a second home. Baby boomers at or near retirement continue to propel the demand for second homes, creating an expanding pool of buyers.
In recent years, vacation sales exploded, to the point where they accounted for 21 percent of all home sales in 2014. Last year a dwindling number of bargain-priced properties led to tighter supply and fewer sales, and caused the price of vacation homes to rise. Still, vacation home sales accounted for 16 percent of all home sales in 2015, according to the National Association of Realtors.
Second homes have their quirks
Buying a vacation home differs from buying a primary residence in a lot of ways. Inventories and prices vary more on a seasonal basis. Tax policies and lenders’ underwriting standards treat second homes differently, especially if you plan to rent out your property when you’re not using it. Owning and maintaining a vacation home in a resort areas can incur costs you might not anticipate.
Here’s a summary of important differences to keep in mind when buying a vacation home.
Vacation home mortgages
Second-home loans generally require more money down and a better credit score than owner-occupied home loans, which is the reason that about half of vacation-home buyers pay in cash. However, you can use equity in your primary home to take out a home equity line of credit and use it to make the down payment on a vacation home.
If you’re making monthly mortgage payments on a primary residence, lenders look carefully at your debt to income ratio to be sure that you are financially capable of paying two mortgages. Your total debt payments, including all mortgages, can’t exceed 36 percent of your gross income, but if you plan to rent the place, you can count some of that assumed rent as income when calculating the ratio. The lender will tell you what’s an acceptable assumption.
If you have an FHA loan on your primary residence, FHA will not finance a second home unless it is necessary for employment and is not a vacation home. Also, FHA loans are generally intended for owner occupants and the agency frowns on borrowers who use rent out FHA-financed homes. VA loans cannot be used to buy vacation homes.
Tax treatment
If you use the place as a second home—rather than renting it out as a business property—interest on the mortgage is deductible just as interest on the mortgage on your first home is. 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 that was used to acquire or improve the properties.
However, when you sell a second home you do not qualify for the exclusion from capital gains that allows home owners to take up to $500,000 of profit tax-free when they sell their principal residence.
If you plan to rent out your vacation home, very different tax rules apply depending on the breakdown between personal and rental use. If you rent the place out for 14 or fewer days during the year, or if you use it for more than 10% of the number of days the home is rented out, you can pocket the rental income tax-free. The house is considered a personal residence, so you deduct mortgage interest and property taxes just as you do for your principal home.
If you rent it out for more than 14 days, you must report all rental income on your tax return. You can deduct rental expenses, but you must allocate costs between the time the property is used for personal purposes and the time it is rented.
If you rent the house half the time, for instance, half of your mortgage interest, property taxes, utilities, insurance costs, and repair expenses are deductible against rental income. The other half of your interest and property taxes would still be deductible against your other income because it’s a second home.
Costs you may not anticipate
Renting your vacation home increases your maintenance costs considerably. Most vacation home buyers last year lived 200 miles away from their new purchases.
If you fit that pattern and live far from your vacation home, you’ll have to hire a property manager. Maintenance costs for repairs, upkeep, and yard work increase when tenants are involved. Marketing vacation rentals can also be costly. You are competing with other owners who can count on repeat business. To get established, you’ll need to spend time and money on listing sites.
Many vacation spots are prone to natural disasters like hurricanes, floods, forest fires and earthquakes. Don’t be surprised if your insurance premiums are higher than your primary residence. Electricity and other utilities may be higher in rural or semi-rural areas.
Tips on buying a vacation home
- Take a few weekend trips to make sure it’s the right spot for you. Pay close attention to travel times and restaurant and recreation accessibility to properties you are considering. Make sure to choose a knowledgeable local real estate agent who will know the local comps and any area idiosyncrasies.
- Keep emotions out of any decision-making. Don’t fall in love with a property until you have done your due diligence, even if that cute place on the beach looks perfect. Once you are burdened with property taxes, insurance, and other fixed and sometimes unrelenting costs, you can’t change your mind without the potential of considerable loss.
- Before you decide to buy, know how much you’ll use it. Will you be able to visit your vacation home monthly? Quarterly? Annually? If you’re not confident that you’ll be able to make the time to take advantage of a vacation home, you need to evaluate whether it’s the right decision to buy one or not.
- Think long term. While vacation homes can gain value over time, short-term speculation on residential real estate is risky business, and most buyers settle on a property they’ll enjoy for many years to come. Planning for long-term enjoyment can mean buying a place that’s big enough for a growing family, or choosing an area with a range of recreational opportunities to accommodate evolving interests.
from Total Mortgage Underwritings Blog http://ift.tt/2c8ziB1
No comments:
Post a Comment