Tag Archives: buying

6 Financial Perks of Being a First-Time Homebuyer

From mortgage points to PMI, unlock the essential info about how homeownership affects your tax burden.

Hours after we closed on our first house, my husband and I sat in our empty new living room and stared at the walls. He was the first to speak, saying simply, “I thought it was painted.”

We learned a lot about that old house over the next 15 years. While we knew to expect some of the work, other tasks, such as needing to paint the walls, we figured out as we went along. One of the changes we didn’t anticipate was needing to make some adjustments to our tax forms.

The forms you fill out when you buy your house are just the beginning. We quickly understood that first-time homeowners have years of mortgage and insurance paperwork to look forward to. Then, of course, there are the taxes. To help you sort through that pile of paperwork and ensure you’re saving as much money as possible we did some research into tax benefits that can come from buying.

Six Tax Benefits for New Homeowners

1. You can deduct the interest you pay on your mortgage.

The home mortgage interest deduction is probably the best-known tax benefit for homeowners. This deduction allows you to deduct all the interest you pay toward your home mortgage with a few exceptions, including these big ones:

  • Your mortgage can’t be more than $1 million.
  • Your mortgage must be secured by your home (unsecured loans don’t count).
  • Your mortgage must be on a qualified home, meaning your main or second home (vacation homes count too).

Don’t assume that if you are married and file a joint tax return, you have to own your home together to claim the interest. For purposes of the deduction, the home can be owned by you, your spouse, or jointly. The deduction counts the same either way.

And don’t worry about keeping track of how much you’re paying in interest versus principal each month. At the end of the year, your lender should issue you a form 1098, which reports the amount of interest you’ve paid during the year.

Warning: Since, as a first-time homeowner, you pay more interest than principal in the first few years. That number can be fairly sobering.

2. You may be able to deduct points.

Points are essentially prepaid interest that you offer upfront at closing to improve the rate on your mortgage. The more points you pay, the better deal you get.

You can deduct points in the year you pay them if you meet certain criteria. Included in the list (and it’s a long one): Points must be paid on a loan secured by your main home, and that loan must be to purchase or build your main home.

Pro tip: Points that you pay must also be within the range of what’s expected where you live — unusual transactions may cause you to lose the deduction.

3. Depending on the year and your income level, you may be able to deduct PMI.

Private mortgage insurance, or PMI, protects the bank in the event you default. PMI may be required as a condition of a mortgage for first-time homebuyers, especially if they can’t afford a large down payment.

For most years, PMI is not generally deductible, but the specific rules around it change annually. In 2016, if you made less than $109, 000 a year as a household, you could claim a tax deduction for the cost of PMI for both their primary home and any vacation homes. Check to see if the PMI deduction is a possibility as you are working on your taxes.

4. Real estate taxes are deductible.

Real estate taxes are imposed by state or local governments on the value of your property. Most banks or other mortgage lenders will factor the cost of your real estate taxes into your mortgage and put those amounts into an escrow account.

You can’t deduct the amounts paid into the escrow, but you can deduct the amounts paid out of it to cover the taxes (you’ll see this amount on a form 1098 issued by your lender at the end of the year).

If you don’t escrow for real estate taxes, you’ll deduct what you pay out of pocket directly to the tax authority.

And don’t forget about those taxes you paid at settlement. If you reimburse the seller for taxes already paid for the year, you get to deduct those too.

Those amounts won’t show up on a form 1098; you’ll need to check your settlement sheet for the totals.

5. Your other tax deductions may matter more.

To take advantage of these tax benefits, you have to itemize your deductions on your tax return.

For most taxpayers, this is a huge shift: in many cases, you’re moving from a form 1040-EZ to a form 1040 to list expenses on Schedule A.

In addition to interest, points, and taxes, Schedule A is where you would report deductions for charitable donations, medical expenses, and unreimbursed job expenses.

For itemizing deductions to make good financial sense, you generally want to have more total deductions than the standard deduction (for 2015, it’s $6,300 for individuals and $12,600 for married couples). Most taxpayers don’t reach those numbers — unless they’re homeowners.

The home mortgage interest deduction, in particular, tends to tip most homeowners over the standard deduction amount, making those other deductions (such as medical expenses) that might otherwise go unclaimed more valuable.

6. You’ll get capital gains tax relief down the road.

I know you just bought your home, but admit it: Resale value is something you considered when you chose your home. And different from other investments for which you’re taxed on the full value of any gain, you can exclude some of the gain attributable to your home when you sell.

Under current law, you can avoid paying tax on up to $250,000 of gain ($500,000 for married filing jointly) so long as you have owned and lived in the property for two of the last five years (those years of owning and inhabiting don’t have to be consecutive).

Gain over that amount is taxed at capital gains rates, which are generally more favorable than ordinary income tax rates.

 

Post courtesy of trulia.com

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What’s Really Included In Closing Costs?

Expect property taxes, homeowners insurance, and lender’s costs to be part of your settlement-day tab.

With your house-hunting and lender searches now in the rearview mirror, you can start steering your way around the final bend that leads to the driveway of your new home: settlement day and closing. A few days before you meet with your real estate agent, a title company representative, and your loan officer for this joyous event, you should have received from the title company a copy of your closing documents. Read these documents carefully — they will include details on the closing costs that are due upon settlement.

  • What are closing costs?

    Closing costs are lender and third-party fees paid at the closing of a real estate transaction, and they can be financed as part of the deal or be paid upfront. They range from 2% to 5% of the purchase price of a home. (For those who buy a $150,000 home, for example, that would amount to between $3,000 and $7,500 in closing fees.) Understanding and educating yourself about these costs before settlement day arrives might help you avoid any headaches at the end of the deal.

  • What’s included in closing costs?

    Closing costs will cover both recurring and nonrecurring fees that are a part of your transaction. Recurring costs are ongoing expenses that you will continue to pay as a homeowner, with a portion due upon closing; nonrecurring fees are one-time fees associated with borrowing money and the services that were required to purchase the property.

    Recurring closing costs are placed in your escrow account, which you might view as a forced savings account for those upcoming home expenses you’ll be facing. They can vary, but the most common ones are property taxes (one to eight months’ worth, depending on when your home purchase coincided with the local tax billing cycle), homeowners insurance (the annual premium is typically due at closing, plus another two or three months’ worth of payments), and prepaid loan interest (for the number of days you’ll have the loan until its first payment is due). Also placed into escrow are costs for title insurance, which is considered a must because it protects you in case the seller doesn’t have full rights and warranties to the title of the property.

    Nonrecurring closing costs are fees paid to your lender and other professionals involved in the transaction. They include: any home inspection fees; any discount points you’re paying upfront to lower your interest rate; an origination fee, which is charged by the lender to process your loan; a document-prep fee, which covers the cost of preparing your loan file for processing; an appraisal fee, which covers the cost of a professional estimating the market value of the home; and a survey fee for verifying the home’s property lines. Also expect as nonrecurring costs: an underwriting fee for the cost of evaluating and verifying your loan application; a credit report fee for pulling your credit scores; title search and recording fees; and a wire-transfer fee for wiring funds from the lender to your escrow account.

  • How to prepare for closing costs

    The best time to study closing costs is when you’re shopping for a lender and can compare your desired loan amount with interest rates you’re offered (plus any discount points you might plan to pay upfront to lower those rates). Then use a closing-cost calculator to determine what your costs might be. The calculator will gauge your monthly mortgage payments, based on whether you’re financing the closing costs into your mortgage or whether you’ve decided to pay them upfront.

5 Tips Real Estate Investors Need to Know to Find Good Deals

With real estate prices reaching ever-higher highs in large swaths of the country, the availability of deeply discounted properties is drying up. And that means it’s getting tougher for real estate investors and home flippers to find great deals worthy of their time and cash.

“There are fewer foreclosures to buy, but there’s more interest in buying foreclosures,” says Daren Blomquist, senior vice president at ATTOM Data Solutions, a real estate data firm. “Competition, even at the foreclosure auction, is pushing prices up.”

Bank-owned property sales, foreclosure auctions, and short sales still made up 16.9% of single-family home and condo sales in the first quarter of 2017, according to ATTOM. But that’s down from 20.3% of sales a year ago.

“Back in 2007, you were getting 20% off the actual value” on bank-owned property sales, Leland DiMeco, owner and principal broker at Boston Green Realty, told ATTOM’s Housing News Report. “Now you have them selling for 5% off, if that.”

So how can established and aspiring real estate investors and home flippers find a real deal?

Tip No. 1: Be proactive and look for off-market properties

Some landlords prefer to quietly shop around their properties to investors instead of listing them publicly. This way, the owners don’t upset any tenants currently living there.

“There is quite a bit of the pie that does get moved around, legitimately, but just off-market,” DiMeco told ATTOM.

So would-be investors shouldn’t wait for property owners to find them—they should find these folks themselves.

“If you like a neighborhood, you can go knock on doors,” Blomquist says. There might be “homeowners who may want to sell and don’t even know they want to sell yet.”

Tip No. 2: Act fast and pay with cash

There are still deals to be had—if you act quickly, says real estate investor Brandon Turner, author of “The Book on Investing in Real Estate With No (and Low) Money Down” and “The Book on Rental Property Investing.” He owns 52 rental units in 18 properties and has flipped about a dozen homes in Grays Harbor County in Washington.

“You have to work faster than everyone else,” he says. “I try to make an offer within 24 hours of a new listing coming on the market—the same day, if possible.”

Paying all cash can also sweeten the deal for sellers who might have multiple offers, he says.

Tip No. 3: Don’t ignore potential tear-downs

Real estate investors might not initially see the value of buying an overpriced, small, or run-down home within the city limits. But many of these homes in desirable locations can be sold to a developer to be torn down. Then a multifamily building or larger home can go up if the zoning permits it. And that can translate into some serious moolah.

It requires some vision and a bit of a leap of faith. With a potential tear-down, “it may not be a good deal to buy it as a single-family home. But if you can buy it for what it could be, it can be an excellent way to find value and deals,” Turner says. However, this approach is not without risks and obstacles.

“If you’re going to build a new house, it takes a good while to get all the permits,” he adds. “The danger is if the market begins to decline, you might be unable to sell it.”

Tip No. 4: Seek out nasty, smelly homes

Investors shouldn’t shy away from hardcore fixer-uppers and “nasty” homes, says Turner. That’s because there is not as much competition for these potential diamonds in the rough. Many lenders won’t issue loans on these properties if they’re in really bad shape.

“The stinkier the house, the better,” Turner says. “Smells are easy to fix. A good coating of oil-based primer, new carpet, and cleaning will take care of almost any smell.”

He typically looks for the “nastiest house in the nicest neighborhood,” he says. Even homes in need of serious TLC can be profitable if they’re in the right location.

“You can’t fix a neighborhood, but you can fix the house,” he says.

Tip No. 5: Look in another city or state

Many would-be property investors living in pricey parts of the country would love to become landlords—but can’t afford to do so in their own cities. So they can consider buying in lower-priced markets such as the Midwest.

“Look in other geographies that aren’t in your backyard,” Blomquist says. Focus on places that are growing “that still have a lot of lower-priced inventory available.”

But they should make sure to do their homework first to make sure they understand the neighborhood they’re buying in and who their potential tenants or buyers would be. This includes how much they can realistically charge.

Landlords might need to hire property management services if they can’t afford to get there quickly if something breaks. And that eats into profits.

———

Remember, becoming a real estate investor is still risky

Despite the stinky homes, investing in real estate might seem like a glamorous way to make a little extra cash—just look at all of those home flippers on HGTV! But in reality, it’s not risk-free.

Landlords sometimes have tenants who trash homes or don’t pay the rent on time. Flippers might encounter permitting problems or find costly structural issues in homes that cost quite a bit more than expected.

“We’re in a booming housing market. Everyone’s confident if they buy a piece of real estate it’s going to go up in value,” says Blomquist. “That’s true for the long term.

“This housing boom is on a lot more solid foundation than what we saw 10 years ago,” he says. “But you have to be very cautious because, in the short-term, we have seen … that prices sometimes do go down.”

Courtesy of realtor.com

How Much House Can You Really Afford?

Just because a lender approves you for a mortgage doesn’t mean you can comfortably afford it.

If you ask Google “how much house can I afford,” you’ll find a number of online tools and mortgage calculators to help you find a fast answer. You might also find quick but somewhat confusing advice like “your mortgage payment shouldn’t take up more than 35% of your monthly income.”

Quick. Do you know what 35% of your monthly income is? If not, you’re not alone. While online housing tools are a helpful starting point for the early stages of your house hunt, it’s important that you understand how the pieces all fit together, and that you take your personal financial situation into account.

Why a calculator can’t tell you how much house you can afford

  1. 1. Financial rules of thumb may not apply to you

    While 35% seems like a straightforward figure, your financial picture is a lot more complicated than that number would make things seem. Your ideal monthly housing costs could vary depending on things such as debt and other monthly payment obligations — not to mention how much you’ve saved for a down payment.

    If you have high credit scores and a clean financial background, a mortgage calculator can be a great starting point for mortgage shopping. You’ll get a much better sense of what your price range might be instead of a blanket rule of thumb. But they’re only as accurate as the information you provide, so if you forget to add regular budget line items such as food, day care, or gas costs, you won’t get a complete picture.

  2. 2. Your lender may approve you for more than you can realistically afford

    Lenders are now legally required to ensure borrowers can “reasonably afford” to repay a loan before they approve a new mortgage. But there’s a difference between being able to reasonably afford something and being able to realistically afford something.

    When looking at what’s reasonable, lenders account for your income and any current debts that you need to repay each month. If you make $5,000 per month after taxes and need to pay $500 toward your car loan each month, a mortgage payment of $1,500 may seem perfectly reasonable.

    In this (extremely simplified) example, you’d have about $3,000 per month left over to handle all your other expenses. And perhaps you can afford your living expenses on this budget.

    But what about the other goals you want to achieve? What about saving for retirement or investing for your future?

    If you commit to a large monthly mortgage payment, you may find yourself squeezed to make your remaining money cover your living expenses, plus monthly bills and loan repayments. While a lender can give you a mortgage you can reasonably afford, it could mean not being able to handle other financial priorities.

  3. 3. You’re the only one who can determine what’s comfortable

    Only you can examine your life and values to determine what you are willing to spend on your mortgage budget — and what you’re not.

    You might be perfectly happy to take on a larger monthly mortgage payment in exchange for reducing meals out, cutting back on vacations, or sticking with your old phone instead of going for the upgrades just because you can. Or you may decide that renting makes more sense for you because you can mitigate costs, take on less financial responsibility, and enjoy more flexibility.

    Either way, you need to determine what you feel comfortable with. You need to decide what works within both your budget and your long-term plans to reach goals that matter to you.

  4. 4. Ask yourself these questions to decide how much house you can really afford

    Once you set your financial priorities, here’s where you’ll need to do the math:

    • What’s my current income? What are my basic living expenses? What are my fixed costs?
    • How much do I want to put away each month into savings or investments?
    • How much will it cost to maintain my new home?
    • What kind of down payment do I have? (The more you put down, the smaller your monthly mortgage payment will be.)

    Now you can factor a mortgage into all of the above, and see how much you can really afford. When doing so, don’t forget to count both the mortgage principal and interest — along with property taxes, homeowners’ insurance, and other extras such as HOA fees.

Post courtesy of trulia.com

What You Need to Know About Buying a House This Summer

Planning on buying a house this season? Go in prepared with advice from the pros.

Summer brings longer days, warmer weather and more people out house-hunting — particularly families hoping to get settled before the school year begins in September. But there aren’t necessarily more houses on the market—and this year that’s truer than ever. “Inventory is the lowest I’ve ever seen it,” says Denver, CO, agent Susie Best. Recent Trulia research bears this out, showing inventory falling for 8 consecutive quarters. The reasons are varied: investors bought up homes during the crash and are renting them out now; prices have risen so much that homeowners can’t afford to trade up; or some homeowners are still underwater and can’t afford to sell yet. This means “multiple offers are driving up prices,” says Best. How to up your chances? Here’s what agents are advising buyers to do in this hot market — at the hottest time of year.

7 Tips for buying a home in the summer

  1. 1. Research trends based on your market location

    While many markets are red hot in the summer, that isn’t true across the board. For example, Chicago winters are long and many families seize the all-too-brief summers for vacation, so single-family home sales slow down a bit from June to September. “Right now we’re really a tale of two markets,” says Jennifer Ames, a Chicago, IL agent and a broker with Coldwell-Banker. “There’s a home surplus at the high end; the starter homes are where the competition is. I tell buyers, ‘Understand the dynamics of your particular market.’ They’re not all the same.” You can use Trulia Maps to check out historical pricing trends in the housing market where you’re looking.

  2. 2. Line up your financing

    This one applies year-round. And although interest rates will probably keep creeping up, “it’s still relatively cheap to borrow,” says Ashley Kendrick, an agent in Kansas City, MO. Even so, sellers are much more apt to consider buyers who present a loan preapproval letter up front. And make it from a known lender like a bank—not an application completed online.

  3. 3. Be clear with yourself on what matters most

    Make a list of your must-haves, your wants, and your it-would-be-nices so you’re ready to decide right away. “This is no time to be a lookie-loo,” Best says. “There’s no more, ‘Let me see if I qualify for this and come back.’” Know what you can live with and what you can’t live without.

  4. 4. Don’t quibble on price

    As the inventory for starter and trade-up homes continues to shrink, the competition for what’s available on the market is fierce. In markets where this is happening, “the price is never the price,” says Anthony Gibson, an agent from Austin, TX — buyers may need to offer more to stand out. “A healthy down payment always appeals,” Kendrick adds, since it suggests you’d have cash to cover any difference between appraised value and a higher asking price; you may be asked to sign a waiver agreeing to that. That’s not raising the overall price, Best notes—just how much you’d pay outside the loan.

    A bigger earnest-money payment (the good faith deposit you pay to a seller to show you’re serious) could also provide an edge, says Jennifer Ames. “A typical initial check might be $1,000; I might advise a buyer in competition to start with $5,000.”

  5. 5. Get your own real estate representation

    Particularly when timing is everything, a house-hunter needs the right agent. “Make sure yours can provide accurate information the minute a home hits market—for example, whether the seller is reviewing offers as they come in or after the weekend,” Best says. And do get your own agent to represent you: This is no time to try enticing a listing agent to handle both sides of the deal in an effort to curry favor with the sellers. With competing bids flying, you want someone fully focused and advocating on your behalf.

  6. 6. Craft a strong offer

    Top bid doesn’t always mean highest price. For sellers, flexible terms may be what clinches the deal—say, letting them pick the closing date, or a generous leaseback period that lets them stay put until they close on buying a home. Be sure not to load up your offer with unnecessary contingencies. “It’s important owners know they’re getting what they want,” Gibson says. And don’t forget the personal touch: “A letter to the seller always helps,” Kendrick suggests.

    Need some inspiration for that a letter to the seller? Here are three offer letter templates to get you started.

  7. 7. Don’t sweat it if it doesn’t happen by August

    Even when deals fizzle, the waiting and offering will probably pay off. “I tell my buyers, ‘You’ll find a house,’”  Kendrick says. “It’s a patience game.”

Post courtesy of Trulia,

10 Tips for Spring Home Buyers

Follow these 10 tips to make the home-buying process a happy one.

The arrival of spring means it’s time to start fresh. Along with pulling out your warm-weather wardrobe and tackling spring cleaning, you may have a bigger project on your to-do list: buying a new home.

Before you start on your home-shopping journey, check out these 10 home buying tips to save you both time and money.

Find the right agent

Real estate expert Joe Manausa says the key to happy spring home buying is finding the most qualified agent to guide you through the process.

With reviews available at your fingertips, finding a real estate agent you trust can be easy — provided you take the time to do some research.

Check for agents with the best reviews, and give them a call. They’ll relieve some of the pressures of home buying, and walk you through all the necessary steps.

Think location

Sure, the three things that matter most in real estate are “location, location, and location.” Nonetheless, some buyers end up purchasing a home in a location that’s not right for them, simply because they make their choice for all the wrong reasons.

“They’re looking at a house in the wrong area or the wrong school district, but they buy it because they like the kitchen,” Manausa says.

Use the new open house

The internet has completely changed the home-buying process, making it easier to choose which homes to go see in person.

With 3-D tours available on the web, buyers can tour a home from their mobile device or a computer. Eighty-seven percent of home buyers use online resources during their home search, according to the Zillow Group Report on Consumer Housing Trends.

Buy a home, not a project

Buyers who purchase a fixer-upper can end up spending the same (if not more) than they would on a new home.

“When buying a home, pay close attention to the ‘bones’ … and avoid getting caught up in the cosmetic features,” advises Dan Schaeffer, owner of Five Star Painting of Austin.

If the kitchen cabinets are in good shape, but you want the space to be brighter, adding a fresh coat of paint is easier and less expensive than replacing all the cabinets.

Ka-ching! Be a cash buyer

Sellers are more likely to choose the buyer who already has money in hand over an offer that’s contingent on a mortgage loan.

But if you can’t pay cash, getting pre-qualified for a loan can help the seller feel more confident that you’ll be able to secure financing.

Avoid disaster — get a warranty

The last thing you want after buying a home is for something to go wrong. You protect your car, so why not your home? Manausa recommends purchasing a home warranty: “[They’re] very affordable, and cover all the things that go wrong.” Your wallet will thank you.

Make inspection time count

Small problems eventually turn into big problems. The wood could rot, drains could leak, or the electrical panel may not be up to code. “Hire experts, and always get your home inspected,” adds Nathanael Toms, owner of Mr. Electric of Southwest Missouri.

If the inspection reveals issues, be sure to deal with them effectively. For example, “it’s very important that a licensed electrician makes sure all circuits work properly,” say Dana Philpot, owner of Mr. Electric of Central Kentucky.

Put safety first

No matter the neighborhood or the home, your family’s safety should always be the number one priority after purchasing a home.

“Even if the previous owner promised to return the copy of every key, it’s always a good idea to change the locks throughout the exterior of the home,” says J.B. Sassano, president of Mr. Handyman. “If the house has an alarm system, remember to change the code — and don’t forget the garage door.”

Fix common repairs

Repairs may come in the form of patching up small nail holes or weatherproofing electrical outlets. Whatever the need, Schaeffer recommends fixing the repairs before moving in your belongings. “An empty house is easier to maneuver and clean,” he says.

For bigger jobs, find a professional to complete the repairs. Sites such as Neighborly can help you find home services providers.

Add the finishing touches

The best part about buying a new house is making it a home. Change the color of the walls, update the lighting, or add a more personal touch with a photo gallery wall.

“It’s important to find the right gallery layout by measuring the wall space, which determines the size of photos you can use,” Sassano says. “Lightweight frames are the safest option, especially when hanging on drywall.”

Courtesy of zillow.com

Guide to Buying a Second Home or Vacation Home

One out of three homes sold in 2007 was a vacation home or investment property, showing that demand for second homes remains healthy despite a slow housing market. Reasons for buying a second home vary, from recreation and vacation enjoyment to investment and development to retirement planning.

With homebuyers enjoying an advantage in many markets, now may be the time to buy that second home. Whether you’re dreaming of paradise or profit, follow these five steps for a smart investment:

  • Step 1: Decide if it’s the right time to buy
  • Step 2: Know what to look for in a second home
  • Step 3: Explore financing options and negotiate with the seller
  • Step 4: Learn the tax ins and outs
  • Step 5: Research alternative ownership options

Second Home Factoids:

Median age of buyer: 46 (baby boomers own 57 percent of all second homes)
Median household income: $99,100
Median price of second home/nonprimary residence: $211,000
No. 1 reason for buying: Family retreat
No. 2 reason: Future primary residence
No. 1 location to buy: The South
No. 2 location: The West
Most popular type: detached single-family homes, followed by townhomes and condominiums
Most popular area: suburbs, followed by small towns, urban areas, resort and vacation areas

Source: National Association of Realtors

Step 1: Decide if it’s the right time to buy.

Think through your plans for a second property before you leap, advise experts.

  • Assess your goals. It may come down to investment reasons, vacation enjoyment or a combination of both. Want a place within driving distance for a retreat? Looking for a family vacation spot? A jump on a retirement home?
  • Consider the market conditions, your personal finances and the affordability of the property. Given the downturn in housing prices with many U.S. regions taking hits, there are deals to be had, says Melanie Greenstein, principal of Rise Network in Minneapolis, a real estate brokerage specializing in second homes. “Use the right agent in the right city and if you do your homework, you can find some phenomenal buys. Don’t plan to flip or sell the property within the next 12 to 24 months.”
  • Focus on areas with steady appreciation rates. Don’t bank on renting out the home or having all your expenses covered, advises Lynda Traverso, GRI, Realtor with VIP Realty Group in Sanibel Island, Fla. “Do look at a second home as an investment and consider areas where homes are going to appreciate.”

Step 2: Know what to look for in a second home.

Once you have a good idea of your goals around a second home, it comes down to homework and scouting for the right property in the right location.

  • Try it out first.
    When assessing location, particularly for a vacation home in an area you’re not familiar with, renting for at least one stay is always a good first step. Carefully consider travel time and expenses against how often you plan to use the home, real estate broker Ruth Krinke says. “How accessible is the property? With the price of gas today and rising airfares, this is a big issue.”
  • Talk to the locals.
    Even if you’ve been vacationing in the same area for years, getting to know the place from a local perspective is important before buying a home there. Talk to residents and ask them what they like about the area, how it’s changing, what types of people are moving there and what it’s like off-season.
  • Act like a local.
    You should also visit the area yourself during each season to get a feel for what it’s like year round. While you’re there, scope out restaurants, grocery stores and entertainment. Does the area have enough of the things you like to keep you interested? Also check out the public school system; even if you never plan on your kids attending there, homes near great schools have more value.
  • Look at the comps.
    To help gauge whether the property is a good investment, review other home sales in the community to examine what the track record is on resale values of similar properties, Traverso says.
  • Know the rules of renting.
    If you plan to rent the property, expect to do additional research. For example, some communities ban weekly vacation rentals, allowing only for monthly rentals. “It depends on the homeowners association and the city law,” Traverso says. On the flip side, if you’re craving a quiet retreat, you may not want to vacation in a community with a lot of rental turnover.
  • Work with an experienced agent.
    A seasoned real estate agent can help you weigh your criteria and make all the difference in a second home purchase. Try these tips for finding an agent or broker:

    • Scout local listings, including free sales publications that list the type of property you want to buy.
    • Find an agent that knows the area and property values. “Select one with at least five years minimum experience in that marketplace, preferably more,” Greenstein says.
    • For extensive searches, scouting in resort communities or exploring alternatives like fractional ownership, consider an agent with the Resort & Second Home Property Specialist (RSPS) Certification by the National Association of Realtors.
    • Beyond the sale, a good agent will stay in contact and help you. This is particularly important for homeowners who may not live near the property.

Step 3: Explore financing options and negotiate with the seller.

In many ways, second home purchases are similar to the primary home purchase. Realtors say putting 20 percent down or more is common for second homes to avoid the expense of mortgage insurance and given today’s tightened lending practices. “It’s possible to buy a true second home with 5 or 10 percent down, but it’s tricky,” says Ruth Krinke, RSPS (Resort & Second Home Property Specialist), associate broker with Steamboat Real Estate in Steamboat Springs, Colo.

When it comes to negotiating, second home sellers may be more flexible than their primary-home counterparts. “Second home sellers are often more flexible in price and terms of sale. They may want out because they are overextended or their lifestyle has changed,” Greenstein says.

To move the sale along, buyers can request special terms of the seller. For example, as an incentive, sellers might be willing to carry a second mortgage for three to five years, Traverso says. “Sometimes banks will accept 10 percent from the seller when the buyer puts down 10 percent. The seller may take on a burden to get the deal done when banks will only loan 80 percent of the value of the home.”

Consider these tips when investigating your financing options:

  • For mortgage financing, use a local lender in the area you are buying, Traverso says, because its expertise and knowledge of the market can avoid problems later;
  • Stricter guidelines are involved in qualifying for a mortgage for an investment property. Typically, borrowers pay a higher interest rate;
  • If you do need the rental income to qualify for the loan, you may need a minimum of 25 percent down, Krinke says. Lenders tend to give credit for up to a 75 percent occupied rate;
  • Other forms of financing include tapping into your primary home’s equity line of credit, known as HELOCs.

Step 4: Learn the tax ins and outs.

Savvy tax planning can make a difference in your return on the property. Tax implications for second homes can vary significantly based on your financial situation and whether or not you plan to rent out the property. Keep these in mind when figuring the impact on your taxes:

  • Consider property taxes, utilities, homeowners association fees and other applicable expenses.
  • Generally, the interest on the mortgage of your second home is tax deductible, and rental properties are subject to additional tax breaks. “If it’s an investment property, then the deductions come in an array of possibilities, including depreciation of the real estate itself and a separate, accelerated depreciation of personal property such as furnishings,” Krinke says. “Owners can use the property only for two weeks a year to get certain tax benefits on rentals,” Greenstein cautions.
  • If you rent out the home for 15 days or more during the year, you have to report all rental receipts to the IRS as income, but you can also deduct operating expenses such as utilities, repairs, insurance and management fees against that income.
  • Consider strategies for reducing or deferring capital gains upon the sale of the home. For example, the Internal Revenue Code Section 1031 tax-deferred exchange allows for the deferral of capital-gains tax by exchanging for “like kind” property allowing for taxes to be paid when a sale of a second or third property is ultimately realized. As a general rule, 1031s are used when you sell real estate held for investment purposes and not for the sale of your personal residence.
  • Always consult with a tax professional or a specialist such as a national qualified intermediary for tax-deferred exchanges before getting too far into the second-home buying process.

Step 5: Research alternative ownership options.

In addition to single-family homes, townhomes and traditional condominiums, experts say to tread cautiously with alternative ownership forms of vacation homes such as fractional ownership, vacation clubs, time shares and condo hotels.

Resale values on certain types of cooperative-ownership properties may not hold up over time and selling these properties can be a burden. “Resale values on fractional ownership properties are usually higher than time shares because very few timeshares are actually deeded ownership,” Krinke says.

Financing is easiest around single-family homes, Krinke says. “Multifamily dwellings, townhomes and particularly condos, can be difficult to arrange financing for.”

Whether you’re looking for a home to spend your retirement days or an investment property to diversify your portfolio, make sure you do your homework and work with the right experts.

Post courtesy of hgtv.com