Buying Investment Property

10 Steps To The Perfect Second Home

Written By Broderick Perkins

• Define your lifestyle interests -- "It's well known that people who buy second homes are primarily looking at areas that have to do with their recreational interests.  It might not be something they are aware of so they have to define what is the appropriate type of place where they'd like to be."

 

• Determine the ideal travel distance -- Ideal traveling time is a matter of personal preference and tolerance, but it is best to limit yourself to a few hours traveling time.  If it's too far or too expensive to reach within a few hours, you likely won't use an owner-occupied second home enough to justify the cost.  Don't sell yourself short by insisting if you buy it you'll use it. 

 

• Research locations -- You've defined your lifestyle but what about affordability, climate, population and all those other issues? Check with the local chamber of commerce, use the Internet, use Escape Homes to find out more about the community.  If you live in Michigan, you can't do a drive-by to find out if California or Florida property is more expensive. 

• Select the desired location -- Within the destination you have to pick the community.  Do you want a patio home or town home for less maintenance?  Do you want a home inland or a beach community?  If you are into beach communities, do you also want a golf community near the beach? 

• Make inquiries with locals -- How many second home owners are there?  Are they true home owners or renters?  Too many renters and they might not be keeping the place up.  You need community details often available only from the residents. 

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• Contact a real estate professional -- A real estate professional is your eyes and ears in distance places.  You can do a lot of things without a real estate agent, but there is a point when the pictures you saw and the virtual tour are not enough.  A Realtor can highlight areas of interest.  You have to rely upon someone who knows the area rather than someone who merely sells homes.

• Visit destinations -- Most people will visit a destination two or three times before they purchase.  You start finding out about the resources, what the travel time is really like if you drive or fly.  Also consider whether this will eventually become your primary residence at some time.  Are you really sure this is where you will want to live? 

• Review financing options -- Financing for a second home is different and you may pay more, about 1/2 point to 1 point more.  There are also different insurance criteria.  The good news is you still get the mortgage deduction.  Involve your tax professional in the financing part of the transaction.

• Purchase through a resort specialist --  People selling in a resort area know more about a particular area and typically take it very serious that business comes from the outside.  Outsiders' questions are quiet different from those inside the area. 

• Enjoy the process -- This isn't your primary residence and everything doesn't have to be perfect.  Have a little fun with it.  You probably do not have to be near the best school or within walking distance of the beach. 

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Reasons To Invest in Real Estate

Written by Clifford A. Hockley

According to the U.S. Census Bureau, 75% of multifamily investors are over the age of 45.  Over half of these (51.6%) own less than five units, and they earned approximately 31% of their income from ownership of rental properties. Most real estate investors come to the market later in life because they are concerned about their retirement and are at their highest potential earning power, or some have inherited money or real estate; the U.S. Census Bureau reports that 48% have inherited a home.

  There are four major reasons that an investor might choose real estate for investment:

1.) Cash Flow -- Yes, it is still possible in some parts of the country to have a cash flow return.  In other words after all expenses have been covered:  mortgage, vacancy factor, repairs, property management etc., there still can be some money left on the table.   

2.) Appreciation -- Loosely applying the rules of supply and demand, we can rest assured that with our current immigration patterns as well as our population growth, there will be a continued need for housing over the next 50 years.  You can safely assume a 4% appreciation level.  Some years will be better than others depending upon supply and demand and the escalation of costs and the increased costs of construction and land/infrastructures.  As long as governments keep up major increases in impact fees for developers, your real estate investments will continue to appreciate.

3.) Equity build-up -- You reduce your mortgage and increase your equity with every mortgage payment made on underlying debt.  A portion of your payment goes toward reducing the principal.  The shorter the loan periods, the faster the equity builds. 

4.) Tax savings -- Uncle Sam allows everyone but dealers in real estate to depreciate their investment properties on Schedule E when filing annual tax returns.  Residential properties depreciate over 27.5 years and commercial over 39 years.   

Bear in mind, though, that the government needs to pay its bills and they get their share when you sell one of your investments.  When you sell a property, you will be faced with a 20% capital gains tax on the increase in value of the property and the recapture of the depreciation. 

Regardless of the size of real estate investment, you can make a return and build up your retirement.  It is important to not buy the first investment that comes along; rather you should buy the best investment.  Pick an investment that you are the most comfortable with, maybe your grandmother's duplex.  Choose a real estate agent that has some of his or her own investments to help you and a property management company with good references. 

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