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Second Home

Second Home

Second homes are great investments, but buying and owning one is a bit different than owning a home you live in all the time. In general, it’s harder and more expensive to get a loan for a second home than for your main home. Expect to put down at least 10 percent and to pay an interest rate that is one-quarter to one-half of a percent higher and possibly more if the property is a condo rather than a single-family home.

Insurance will also be more expensive and could be more difficult to find if the property is vacant, as most second homes are some of the time. The Internal Revenue Service will look at your second home differently too if you rent it for 15 days or more. You can read the tax rules for second homes at the IRS Web site: www.irs.gov/publications/p527/index.html .

What qualifies as a second home? If you can sleep, cook and go to the bathroom in something, it can be a second home – whether it’s a cabin, a boat or even a recreational vehicle. Wonder how much second home you can afford? Use this calculator from Smart Money to find out: www.smartmoney.com/home/secondhome/index.cfm?story=howmuch2 .

Investment or vacation?

If you are considering buying a second home that you’ll rent to vacationers, do your homework before you buy. Write down the income you expect to earn and make a list of the expenses you’ll have. Here are some typical expenses:

Maintenance costs
These are higher for vacation rental properties because you have many people coming through the house. The same ocean breezes that draw people to the beach will tear the screen door off its hinges and slam it into the outdoor light fixture. Sand and salt will eat away the exterior of your beach home.

Marketing costs
Who’s going to market your home? If you use a management company, they’ll take 20 to 50 percent of the rental income. Ask what the fee includes and where the firm advertises. If they have a rental magazine, how many properties are in it, how often your property would be in it, and how many people are on their mailing list? You can also develop your own Web site using readily available software and you can ask to list your property on other vacation finder Web sites.

Flood insurance
Flood insurance costs vary depending on your home’s height above sea level, its location and its age. Expect to spend thousands for flood insurance for your beach or riverfront second home. Since hurricanes Katrina and Rita, it has become more expensive and difficult to obtain flood insurance. Even so, the insurance covers just your home, not the sand under it. A big storm can wash away so much sand that the lot becomes "unbuildable," which may cause your house to lose value. Federal flood insurance caps out at $250,000. In some coastal areas, you must buy private flood insurance. Also, flood insurance policies don’t cover damage due to wind and rain.

Hurricane/wind insurance
This is a separate policy that you may have to purchase from a state insurance pool. In certain hurricane-prone areas, this type of insurance may be hard to get.

Fixed expenses
Whether or not your home rents, you’ll have to pay the mortgage, plus the bills for cable TV, heat and cooling, trash, water and phone. To estimate your rental income, take a look at advertisements for similar properties, then check to see what the vacancy rate is in the area. A local real estate firm specializing in rentals can give you a good estimate of how much you should charge.

If the property has always been a rental, ask the seller to disclose the Rents and Royalties schedule from his last few years’ tax returns. Your lender will typically count 75 percent of the estimated rental income, not 100 percent.