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Vacation Real Estate Can Offer Combo of Pleasure and Tax Savings - 2007-11-03 |
I recently had the opportunity to attend a weekend conference of vacation property owners who wanted to maximize their investments in real estate, whether that be at the beach, in the mountains, or in the pines. It was an interesting group from all walks of life.
The program focused on acquiring and managing vacation homes, either for personal use or for rental to others, and covered topics from financing to exchanging to advertising.
Here are some of the questions that were asked:
Q: If there ever was an actual real estate price bubble, it was most prominent in Florida, where a combination of overbuilding and speculation artificially drove up prices. Have prices bottomed out yet?
A: Remember that no two local markets are alike. Some areas have experienced steep declines while others have simply seen a sales slowdown. Unfortunately, by the time we have evidence that prices hit bottom, we will already have missed it. That's the problem with trying to time the market. But if you are a long-term investor who shops carefully and keeps up with changes in the market, you will know when local declines are no longer evident.
Q: Is it possible to buy a vacation home with no money down, then rent it out and have it pay for itself?
A: Probably not. If it were that easy, then demand for new vacation homes would push prices to the point that it would no longer be possible.
Q: Then why should the prudent investor consider owning vacation property?
A: Because it is possible to purchase property in a location where you and your family would like to vacation, and use short term rentals to offset a substantial portion of your ownership expense. In addition, you may be purchasing your retirement home, locking in a good price and financing long before you intend to move there.
Q: If I buy a house or condo at the beach, how much can my family use it?
A: It depends on the level of tax benefits you want to get out of the property.
If you and your family plan to use more than two to four weeks annually, it will be likely classified as a second residence, and you can use it all you want. Your deductions will be limited to property tax and interest payments, and you can rent the home to others if you wish.
However, if you can limit your personal use, you may be able to classify the property as "held for investment," meaning that almost every expense associated with the property becomes tax deductible.
The IRS limits personal use of investment property to "the greater of two weeks or ten percent of the number of nights rented annually." In addition, you will be able to take a deduction for depreciation. All these deductions help offset the cost of ownership.
Q: Which of the above methods of ownership is best?
A: It depends on your family needs and desires. Some families are very happy spending one week a year in Orlando and one week a year in New York. Others truly want a weekend getaway where they can take family and friends on a regular basis.
Q: How much down payment will I need to purchase a vacation property?
A: Again, that depends on your intended use. If the property is to be used primarily as your second residence, you will likely qualify for long term home loans with terms equivalent to primary residence loans. That treatment is extremely favorable, and allows many buyers a chance to buy with little down payment and low interest rates.
If your purchase is to be use primarily for rental, then standard "non-owner occupant" loans are available. These typically require at least twenty percent cash down payment, and the interest rates are as much as a full percentage point higher than primary residence rates. However, many builders offer reduced rate financing as an inducement to purchase, so it's wise to shop and compare.
Q: If I buy a secondary residence, can I still rent it out when I am not there?
A: In most cases, the lender of a second residence loan will not prohibit some rental of your vacation residence. But you will be asked to sign a statement at closing indicating that your primary purpose for the property is personal use, and that you do intend to make personal use of the property as your secondary residence. Talk to your lender for more detailed requirements, as loan programs vary.
Q: If I intend to rely on rentals to help offset the cost of ownership, won't I have to use a rental agency and won't they charge a huge rental fee?
A: How much you pay a local rental agency for managing your vacation property is up to you. In most cases, you get what you pay for.
Full service rental agencies typically handle everything from advertising and booking the guests to cleaning between visitors and taking out the trash after the guest leaves. These traditional realty firms can provide top of the line service, but you will pay the most for this level of detachment. Complete rental and management agencies can charge as much as fifty percent of the rental fee, though a third is more common.
However, many owners have discovered that they are able to handle much of the responsibility of rental booking themselves, and are able to pocket much of the savings.
While vacation renters have traditionally used local agencies to find vacation homes, today's guest most often turns to the Internet to search for the best value. Websites catering to individual owners have sprung up like weeds and have become wildly successful.
The best example of this phenomenon is vrbo.com, which is the world-wide home of Vacation Rental By Owner. This site has almost single-handedly revolutionized the world of vacation rentals.
NEXT WEEK: Exchanging Your Way To The Mountains or The Beach
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