Prices are down, way down. In many areas, we are still looking at five-year lows on home prices. In some popular vacation spots, such as Napa Valley in California, prices are down as much as 47% from the highs of 2006. This trend won’t last forever. If you’re serious about making the purchase of a second home, striking while prices are low just makes sense. Other vacation hot spots are already starting to see price increases, particularly in popular beach communities like Myrtle Beach or Palm Beach. So, don’t wait!
Currently, homes are also spending less time on the market with multiple offers coming in within just weeks of listing. You probably don’t want to immediately jump on the very first property you look at, but when you see the one you like, the time to act is now.
Rentable is Preferable
It’s a second home, which by definition means you won’t be living there full time. So, why not make the property work for you when you’re away? Rental potential affects resale value and can supplement your own mortgage payments. Before you finalize your purchase, it will be important to be sure you can rent out your beach bungalow or ski chalet on a short term basis. Many home-owner associations or townships do not allow short term renting.
Some rental bonuses to keep in mind are:
- Renters like lots of bathrooms. One bathroom per bedroom is always a perk.
- A great kitchen saves renters on having to eat out every meal.
- A hot tub is always hot! Vacationers want to relax and what’s more relaxing than a good soak? A pool is a great perk, but hot tubs can be used year-round, not just in warm weather.
- Look for other amenities that might appeal to renters. Covered patios or porches, fireplaces, lush landscaping and good acreage, peaceful solitude plus easy access to shopping and dining are just a few pluses.
Rental Income is a Bonus Not a Sure-Fire Business
Be aware that if you’re not already an experienced vacation landlord, there are many expenses and responsibilities that go along with renting out your second home. Consider the peak vacation times and that typical get-away properties are only rented about 17 weeks out of 52 in a year. That’s not a full time income and you shouldn’t expect it to cover all your payments and expenses, although it can off-set them.
The income from renting can help you pay your mortgage, but keep in mind you’ll need to pay for cleaning, maintenance and insurance. You may also need someone to manage the property. Be prepared to pay at least 15% of the rental income to the property management.
A local management company should be able to give you information on the area’s history of rental dates plus rates for comparable homes. To break even, you’ll want a monthly loan payment that is less than or equal to one peak week of rent.
Loan Rates Are Determined by Use
Be clear on how you plan to use the home. Lenders are giving greater scrutiny to vacation homes. If the property will indeed be used primarily as your own second home, you will likely pay close to the same mortgage rate as you pay on your full-time residence.
If rental income is necessary to qualify for the loan, the house will be treated as investment property. In this case, expect to pay as much as 25% for the down payment and more interest.
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