Crunching the Numbers
Illustration by Marcos Chin
Owning a second home is not for everyone. "A vacation home is a luxury, and you buy one only when you feel you can truly afford it and when you're getting a better value from it than paying for a rental," says Glenda D. Kemple, a certified financial planner in Dallas. If you're looking to spend just a month or two each year at your second home and don't plan on retiring there, you may find it makes more sense to rent. A lot of people buy second homes impulsively—"usually while on vacation," Kemple says—without thinking about the long-term financial demands.
And what are those demands? Experts say that monthly housing costs for both your primary and secondary residences, including mortgages, maintenance, property taxes, and insurance, should not exceed 36 percent of your gross monthly income. As with a primary residence, you can take deductions for mortgage interest and real estate taxes. You also get a bonus tax break: If you rent out your house for fewer than 14 days each year, you don't have to claim the income on your tax return. Rent it out for more than two weeks, and you'll have to report what you bring in—but you can write off many of your rental-related expenses, including maintenance, advertising, and utilities.
Renting is one way to offset the costs of owning a second home, as long as you plan carefully. Investigate the local market, and build in a 10 to 20 percent cushion to cover your costs. "If the monthly mortgage payment on your home is less than or equal to what you can charge for a week's rent during 12 peak weeks there, you can break even," says Christine Karpinski, author of Profit from Your Vacation Home Dream. Rent it for an additional three weeks during the off-season, she says, and you can cover other expenses, such as maintenance, insurance, and property taxes. One caveat: This only works if you manage the property yourself, since property management firms can gobble up 30 to 50 percent of your rental income.
Finding the Perfect Spot
If you're ready to buy but haven't settled on a location, don't make any commitments until you've found your true geographical soul mate. Test the waters by visiting a town you're interested in several times, talk to people who live there, and, even if you're buying from the heart, check to see how property values and taxes have been trending over the past few years.
You can get more for your money if you buy in uncharted territory—places yet to make the list of America's hottest vacation spots. That's what New Jersey resident Fernando Martinez did. After spending five years searching the Jersey Shore, North Carolina, and Florida in vain for an affordable vacation home for his water-sports-obsessed family, he discovered, through word of mouth, an untapped lakefront treasure in Point Peninsula, New York. Last year, he bought a two-bedroom house for less than $150,000. "This is one of the only places around here where you can find a reasonably priced waterfront home," Martinez says. "Now I have 120 feet of my own beach."