Whether you are shopping for a vacation or rental property, it's never easy deciding when to step back into the housing market. In every market, there are challenges, and there are opportunities.
As encouraging — if modest — signs of an economic upturn appear, many homeowners who have postponed purchasing a second home are taking a second look at opportunities in the market to save money while building equity.
Is a Second Home Still an Investment?
It depends upon who you ask. And what you're looking for in a second home. If the purpose is a vacation getaway, many experts suggest not thinking of it as a property investment but rather as a personal resource, a luxury you'll enjoy with family and friends for years to come. In the past 40 years, the annual gain has been about 6.4 percent nationwide, according to the National Association of Realtors. Factor in the costs of property taxes, fees, maintenance, an 80 percent mortgage and other incidentals, and it's up to the buyer to decide if a vacation home is a worthy investment or not.
As an indivisible, undiversified asset that includes expensive transactional costs, a home is certainly a particularly restrictive type of investment. If the job market is good, house prices usually do well; when the market does poorly, a house's value can fall right when you are most likely to need a financial cushion.
Double digit declines in some areas present an opportunity to walk into equity on the right property. For those who have been holding off purchasing a second home, the decline in the housing market over the past few years presents a chance to save money while gaining the house of their dreams.
Financing a Second Home
Everyone knows securing a loan for a second home can be more challenging than for your primary residence. Needless to say, a good credit score, substantial income and liquid assets are all important factors.
In the case of potential rental properties, your lender will likely want to see a cash flow statement that proves you can generate income from the property. They will also want to determine the property's condition. Regions Bank provides a variety of mortgage calculators to help you make the right financial decision.
Rental vs. Vacation Property
It makes a difference if you are renting the second home or using it as a vacation property. If you rent a vacation home part-time, there are tax benefits. If a property is used as a second home and rented out for fewer than 15 days a year, the owner is not required to report the rental income.
A property's rental history, occupancy rate, and net rental revenue are all good indicators in weighing your decision. Still, location, arguably, is more important than ever since the vacationing public is expecting to find bargains in rental properties in the current climate.
Lifestyle Value vs. Economic Value
There are signs some investors are beginning to think the bottom has come into view in the housing sector, increasing the appeal of a second home for vacation or rental purposes. However, unlike just before the housing market deflated, the current environment doesn't look as conducive to purchasing a second property in order to resell it in a short period of time. Most investors expect their equity gains be realized over the long term.
The reasons people purchase a second home vary greatly. Some see the equation as a lifestyle value versus economic value. But remember, whether financing a second home or purchasing rental property investments, prospective homebuyers need to do their due diligence.