Itching for Investment Property?

More and more individuals are deciding that if one home is good, two must be better.  Whether you are ready to buy a second home for investment or vacation purposes there are a few things that I would like to share with you.  First of all, in order to maximize a second home’s investment value ask yourself these five questions… 

Buy it right

A major factor in achieving a good return on a second home is buying smart.  Select a prime location. Look for a property that’s readily accessible by car and no more than a half day’s drive, or a short plane flight, from a large population center.  Resort-like amenities — whether golf, tennis, water access, or reliable snow for skiing — also help ensure a property’s appeal to a wider audience. Easy walking distance to these amenities (three to seven minutes) adds value. In the end, your best bet as an investor is to buy where people want to be. In a less desirable market, there’s no one to bail you out.

Choose an area with growing demand. Analyze migration trends, the current and potential supply of vacation or rental homes, past and projected price appreciation and home sales growth to assess the area’s prospects for future appreciation, advises NAR Chief Economist David Lereah in his book, Are You Missing the Real Estate Boom?

Know what you’re buying. Check lot lines against the property survey, and investigate water features upstream and downstream to be sure they aren’t polluted or obstructed. Watch for currents that make swimming and navigation difficult. And try to safeguard that valuable view with proximity to park land or conservation easements that restrict building. 

Don’t assume values will always go up. “You have to think about where the market is going and what your hold strategy is. You can’t just buy at any price and operate on the theory that an even bigger fool will come and buy it from you.

Rent it right

The majority of second-home investment buyers — 57 percent according to the NAR survey — rent out their properties at least six months of the year.  If you own property snow resorts (Tahoe, Palm Desert, etc.) renting a home for even a few weeks during the high season there can cover homeowners’ dues and property taxes for the year, plus a part of the mortgage.

Buy with renting in mind.  Look at the house as something to be used by someone else, not by the buyers themselves.  Choose interior features and furnishings with durability in mind.

Determine a target rental audience. Based on the area’s available activities, profile the most likely renters. Then make improvements to the home accordingly.  Families will want play equipment. For a retiree renter, consider grab bars in baths.

Make management easy. Find a reliable home-warranty company that’ll take care of interior mechanical problems when a tenant calls. Combining this service with tenants who send the rent checks directly to the owner can help save on management fees, which can be up to 10 percent of each month’s rent.

Factor in taxes. Renting a home for more than 14 days a year allows owners to deduct expenses such as taxes, repairs, and depreciation for the time the property was rented. However, owners will owe taxes on rental income, and mortgage interest may not be fully deductible according to the CPAs. Different tax treatments apply to the periods of personal use and rental. Please, always check with your accountant if you intend to rent the property.

Sell it right

Real estate specialists predict high-earning baby boomers should keep the second-home market strong for at least another decade. Echo boomers, whose telecommuting lifestyles will allow for more remote work, will also help to buoy the market by spending more time in vacation homes. As a result, price appreciation may drop to single instead of double digits, but properties in moderate climates with strong amenities will continue to perform well.

Consider a 1031 exchange. An exchange is a great way to take the tax bite out of high property appreciation. Since only investment properties are eligible for 1031 exchanges, you must be careful how you use the home, especially the last year before an exchange. The most conservative way to ensure that a second home will be considered an investment for exchange purposes by the Internal Revenue Service is to personally use the home for fewer than 15 days a year and make an effort to rent the home the remainder of the time.  Second-home owners may also be able to use the property more than 14 days a year as long as that use is for a business purpose. Business purposes can include visiting the area to look at other potential property investments, making or supervising repairs to the home, or using it as a base for a company training session or retreat.

Convert the home to a primary residence. When a 1031 exchange isn’t feasible, sellers can consider making their second home their primary home for the two years before they sell it. Even if a property was previously used as a rental, owners can then qualify for the capital-gains exclusion ($250,000 for individuals, $500,000 for married couples). As of Oct. 5, 2004, owners who acquired their second home through a 1031 exchange need to own it for five years and live in it for two of those years to receive the deduction.

If you are considering buying an investment property out of state, here’s 10 hottest second-home spots around United States.  Upon your request, Intero’s relocation department and my own personal network of Realtors around the state and entire country can make you ideas turn into reality.