Is A Second Home Right For You?

SECOND HOME FACTS: The second-home market is expected to double by 2009. The new jargon for the second-home crowd: Splitters.

Splitsville
No, we’re not talking divorce. We’re talking happy families dividing time between their first and second homes. Before you become a Splitter, read this.

Ready for seconds? If it seems like everyone in Dallas these days is off to their “second” home, well, they are. In 2004, second-home sales were up by 16 percent, accounting for more than one-third of all existing U.S. home sales in single family, condo, and new home inventory, according to the National Association of Realtors. The second-home market is expected to double by 2009. The new jargon for the second-home crowd: Splitters. Baby Boomers, 75 million strong, are the first generation to “split” between two houses, says Jerry Ray, senior vice president of corporate communications for The St. Joe Company. And we’re not talking a country cabin with an outhouse: Splitters want fancy kitchens, large closets, and three car or multiple garages in both homes. Buying a second home is so commonplace that the mortgage industry considers second-home purchasers no more of a risk than those buying a primary residence: “Lenders treat that second home loan just like the first,” says Connie Hearn of Advanced Mortgage Inc. That means record low interest rates apply to the beach house as well as the family home.

Home and abroad: Lenders have very recently opened up the home mortgage market in Mexico. One major investor, GE, is backing millions of dollars in mortgage funds for homes in Mexico, where more Americans are buying second homes for pleasure with an eye to retirement. Who knows, maybe one day more Americans will be crossing the border to the south than Mexican citizens coming north? Retirees love Mexico’s low cost of living, warm weather, and culture.

Mexico notwithstanding, the typical Dallas second-home buyer wants a home within 200 to 300 miles of his primary residence and prefers to drive there. If one must fly, flights should be no more than two hours, and the airport better be reasonably close.

Splitters are using their second homes for weekends and vacations, but they also envision their houses as part of their legacy, a place to hand down to their children – more so than the primary residence.

“We drove our children to Seaside, Fla., every summer for years,” says Susan Lowery, a Preston Hollow resident who now owns a 2/2 Watercolor Inn condo (near Seaside, Fla.). “After the kids went to college, I began spending the entire month of October there since it was so easy for my husband to fly down on weekends. We are contemplating a larger unit now to accommodate grandchildren down the road.”

Money Matters
The most amazing thing about the second-home trend is that it has just begun. “The baby boomers are set to inherit trillions of dollars any day now,” says Wayne Franklin of Puerto Vallarta-based Tropicasa Realty. “The biggest prestige item a boomer can own today is a second home.”

Does that mean everyone is laying down cash for the beach house? Not at all, experts say, but second homes do require heftier down payments of 10 to 30 percent. There are 2.5 million U.S. households with liquid net assets of $2.5 million or more and growing, says Lisa Weltz, vice president of marketing for Dream Catcher Retreats, a Colorado-based private destination club company. Experts say several unique economic factors are steering that wealth to second homes as real estate investments.

Interest rates are as low for second homes now as they are for primary residences, as long as the second home is not an investment property. And the promise of appreciation – which has clearly taken place in many markets – has drawn the interest of investors soured on the stock market.

But before you buy, do your homework, advises wealth strategist Maurice M. Glazer, CEO of Glazer Financial Network. He tells clients to scrutinize the realities and numbers to see a second-home ownership makes sense. In some cases, Glazer has had clients work on budgets or even sell their larger primary home to afford a second home.

10 Items to Consider Before You Buy a Second Home

1 How often will you use the home? Will you enjoy spending every vacation in the same place? “We used to cruise to the same ports a half dozen times. Because we liked them,” says Maurice M. Glazer, CEO of Glazer Financial Network. “As the population gets older, it’s tough to go long distances to explore places. The better option might be a comfortable place where you can relax.” Or get out of Dodge.

2 Retirement potential? Since second homes tend to be in warmer climates where older people feel better, a second home could become a retirement castle. Some couples are selling their primary Dallas homes but retaining an Uptown maintenance-free condo, says Glazer – which is what he plans to do. When his kids visit Canyon Lake, north of San Antonio, he’ll put them in a guest house or hotel; the condo will give him privacy when doing business in Dallas. “This is the first generation that has decided to let their kids stay at hotels when they visit home,” says Mike Ridley, general manager of The Preserve at Walnut Springs. Clients are buying 50 to 250 acre ranch land with plans to retire in the country, says Stacey Brooks, an agent with McGregor Real Estate in Hamilton, Texas.

3 Accessibility/Proximity. If your second home is too far away, are you ever going to use it? Are there shops, restaurants, and amenities nearby to sustain your stay? How will you get there, and will you have time to enjoy the stay after getting there? “Unless you are a millionaire with $10 million in the bank,” Glazer says, “I advise against a second home in Hawaii.”

4 Liquidity: Lease? If finances get tight, you could lease it. Experts say renting a vacation home for just 15 days a year may bring in enough cash flow to cover the property taxes or insurance. If you rent it out for fewer than 15 days a year, you do not owe taxes on the rental income. Of course, if you rent it for more than 15 days, you can deduct certain home-related expenses. But renters sometimes trash homes, and maintenance/cleanup can eat up cash flow. Don’t think of your second home as a rental unit, and be sure you carry adequate property and liability insurance: Glazer insists that his clients are flush enough to cover the mortgage and maintenance without having to lease.

5 Liquidity: Sell? Focus on buying for amenities, such as sports and recreational activities, which will draw people to your home. Baby boomers inheriting money and retiring should keep the market strong for at least another decade, appraiser D. W. Skelton says. And this generation’s ability to work from home will sustain sales. Glazer, for example, has an office in his Canyon Lake home where he works, which opens additional tax benefits. Still, a soft market could mean months on the market or a price reduction to sell.

6 Finance with your primary home equity? Generally yes, says Don Hearn and a host of experts. If you have a lot of equity in your primary home, you’re wise to pull that equity out to make the deal over a mortgage. Then place the second home in a limited liability partnership for asset protection. “Sometimes taking money out of equity is a smarter way to go,” Glazer says.

7 Who will maintain it? Most of the time you will need a management company to handle repair work, which is automatic in condo management and most planned communities with, of course, a monthly price tag attached. If it’s a single family home, keep it simple, unless home maintenance is something you enjoy. “We have made our 2 acres as maintenance free as possible,” Glazer says. “I don’t want to be on Canyon Lake with a pier and a green lawn that needs mowing.”

8 A second home can foster family relationships. Glazer bought his Canyon Lake house to be closer to his in-laws and within a 40-minute drive of the rest of family. “We may spend the last days of our lives there nicely,” he says. Keith Svagerko takes his family on weekends to a river house near Livingston, Texas, where the family has no telephones, televisions, or computers. “Pure family time,” says Svagerko, who keeps the cell phone handy only for emergencies.

9 Do not buy on a whim. The purchase needs to be measured and analyzed, Glazer says. After a “good presentation,” one physician client spent $25,000 plus condo dues on a timeshare. “Whims are not conducive to sound financial planning,” he says, “which is why I keep my cell phone open to clients.” Pre-construction prices, on the other hand, may be a good deal when buying a second home.

10 Can you afford it? You can likely obtain a mortgage for a second home if you have a credit score of 680 or better, and a 40 percent debt-to-income ratio on secured debts. “That’s a guideline,” says Don Hearn of Advanced Mortgage. “We look at the whole picture – credit score, history, assets, ratios. High cash reserves would offset a lower credit score, for example.” Mortgage companies also like to see four months of reserves, or living expenses, in the bank. Financial experts like Glazer prefer to see more – at least six. But most people in the age bracket buying second homes have huge assets; their children are likely educated and grown; their 401Ks are funded; or they have just received a windfall inheritance: What better way to memorialize a loved one than to invest their estate in a home the entire family will enjoy.

Own a Home Without Buying One

Second homes are so popular, entrepreneurs have devised many alternatives to outright ownership of condos, luxury homes, and ranches. Those timeshares? A thing of the past. “No resale value,” says Maurice M. Glazer, CEO of Glazer Financial Network.

Fractional Home Ownership
Buy a property with other people and share expenses, and use it only during specified time frames. Pro: Owners receive a deed of sale and full ownership tax benefits at a fraction of the cost; times can be traded. Con: Most fractionals cannot “officially” be leased. When The St. Joe Company, the largest private landholder in Florida, developed The Watercolor Inn and Resort near Seaside, Fla., they built the Private Residence Club as an experiment. It was enormously successful. “We definitely plan on developing more PRCs,” says Jerry Ray, senior vice president of corporate communications for The St. Joe Company.

Destination Clubs
This alternative takes the timeshare concept to luxurious private homes wrapped in club membership, for people who don’t want to be tied to one destination. Dream Catcher Retreats offers homes across the globe that average $3.25 million with sophisticated amenities – Frette sheets, unbelievable mattresses, and concierge services. One-time, refundable membership deposit runs from $165,000 to $325,000 with annual dues from $10,150 to $25,650.

The New Ruralism
In the Hill Country, The Preserve At Walnut Springs offers ranch sharing on a 2,030-acre ranch with a general manager, Mike Ridley, and his staff to do all the work. Buyers own 5 to 7 acre parcels and are allowed one inclusive building acre per parcel. Green-oriented “smart living” is encouraged: solar orientation, macro environment consideration, and rainwater harvesting. The price: about $300,000 per land parcel.