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Pay It Forward

Own your own ski chalet or summer retreat

About the author

Kate Ashford is a New York-based freelance journalist who writes about personal finance and health. She has written for Money, Real Simple and Redbook magazines.

(Thinkstock)

(Thinkstock)

Two years ago, Rebecca and Guy Nerad bought an apartment in a ski resort about an hour’s drive from their home in Vermont in the north east US. Last winter, they spent nearly every weekend there, skiing the slopes with their six-year-old daughter and three-year-old son. The place cost them around $200,000 to buy but they also rent it out for a couple of weekends a year, which offsets some of the costs. “It is not fancy, but it is a great location and it has four bedrooms,” said Rebecca.

It’s a dream that more and more people are acting on. About 11% of all US home transactions in 2012 were vacation-home sales, according to the 2013 Investment and Vacation Home Buyers Survey by the National Association of Realtors. Another 24% were investment-home sales. In the UK, more than 600,000 families own a second home—255,000 in the UK and the other half in other countries. In China, about 15% of urban households own two or more homes, according to the National Bureau of Statistics of China.

And you don’t have to be a millionaire to get in on the game. In Southern Europe, particularly in Italy, Spain and France, it is very common for people with ordinary incomes to buy second properties. “They [the French] use them as holiday homes and rent them out when they are not using them,” said Tim Yates, a financial advisor with the Spectrum IFA Group in Valbonne, southern France.

It is also common for Canadians in large cities, such as Vancouver and Toronto, to keep a cottage or cabin for holidays, according to Julia Chung, a financial and estate planner with Facet Advisors in British Columbia.

In Australia, “there are a number of tax incentives for property investors, which results in all socio-economic classes of people doing it,” said Brett Evans, executive director of Atlas Wealth Management in Southport, Australia. And in the UK, people who buy holiday homes on the coast will often choose eventually to retire there, said Mike Warburton, tax director for the UK’s Grant Thornton.

If you are considering buying a second home here are some of the things you need to know:

What it will take: You can usually count on needing a larger deposit than you paid for your first property, paying a higher interest rate, and having to prove you have enough income to comfortably handle an additional loan payment. For a second home in the US, you will need a stellar credit score alongside this larger down payment. “You may have to come up with 25%,” said Keith Gumbinger, vice president at HSH.com, a US mortgage information website. “And if you are buying it as an investment, you may need a rental history for the property.” This is also true in Australia, where you may have to ask the real estate agent who currently deals with the home for a rental estimate letter which proves the potential rental income of the property. In the UK, buy-to-let mortgages can come with deposit requirements as high as 40%.

How long you need to prepare: Give yourself about six months to plan your purchase. You will need enough time to research the area, the property, and get a handle on the costs involved, both in the purchasing and in the upkeep. In the US, the loan process itself can take as little as 30 days, but it can be delayed by a variety of things. In Australia, the finance process takes about six weeks, but the initial paperwork can take another few weeks to prepare. Whereas in the UK, the house-buying process can take at least three months, but will take a lot longer in some situations such as purchase of an older or listed-building.

Do it now: Be honest about how often you will use your new property. “[Often] clients do not really think in detail, or picture themselves over the next year,” said Bill Cleveland, president of financial services company Preston & Cleveland Wealth Management in Augusta, Georgia in the US. “Between kids’ activities and all the other things going on in life,” said Cleveland, clients often come to the conclusion they will not have as much free time as they think. If you are only going to use it occasionally, or you prefer to holiday in different places every year, a second home is probably not for you.

Run the numbers. If you plan to rent out the property, can you afford it if you’re not able to get the planned rental income? If not, think again. “Rental income is not guaranteed,” Yates said. “And in some areas the authorities are trying to make it difficult for owners doing seasonal rentals in order to free up housing stock for long-term tenants.” Take a good, hard look at the region. Is it already saturated with rental properties that are nicer, or less expensive than yours? Factor that into your decision.

If you are buying the property as an investment, take note of the many hidden costs. “By the time you add in the interest, property taxes, dues, insurance, maintenance, and capital improvements, [these] eat in to a big part of any appreciation,” Cleveland said. “If you have a million dollar property, you could easily have $50,000 a year in all those costs. In that situation, the property would have to increase more than 5% a year just for you to break even.”

Be up front. Mortgage lenders in various countries apply different terms and requirements, depending on the use of the home—holiday versus investment, for instance. If you plan on renting the property out, do not pretend that you are going to live in it to get a better rate. In the US, for instance, “lying on a mortgage application is considered fraud,” Gumbinger said. In the UK, different types of second-home mortgages are very specific about who can live in the house and when, and how often you can let it out.

Consider hiring a professional. Even if you think you have a handle on the costs involved, you may not be aware of all the tax implications. For instance, there will probably be taxes that occur if you rent the property out, and there may be deductions or write-offs available, depending on your situation. Estate planning is also a concern. “Taxation of family vacation homes on death or transfer to family members is starting to become a huge planning issue as the baby boomer generation ages,” Chung said.

Do it later: Alert the right people if the nature of your second home changes. In the UK, for instance, if you purchase a holiday home for your own use that you later decide to let out, your mortgage lender would be entitled to change the terms of your loan and increase your fees, so you have to keep them in the loop. Further, you will need to tell your home insurer. “Your protection levels are going to be different,” Gumbinger said. “Otherwise, if things should go wrong and a catastrophe occurs, they could deny your claims. It can get very complicated.”

Do it smarter: Do not buy on impulse. Loving a house you see while on holiday is not the same as formally investigating an area and doing the cost comparisons. “Properties and locations can look very different in winter from the way they look in August,” Warburton said. Take your time before you make a big real estate decision.

Do your own digging. “Do not listen to your friend or neighbour or anyone else who lacks legal responsibility to give you good advice, who ‘made a killing’ or has a lifestyle that you think you envy,” Chung warned. “Your choices for vacations, family and investments are your own. Base your decision on intelligent research.”

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