Is a second home cause for bliss or stress?

Key Points

IF YOU'RE LOOKING TO BUY

Rarely have I found a second home to be a great investment, so if you are buying one, your primary goal should be to have a place to create memories with family and friends. That being said, it is an attractive time to buy a second home. In addition to property values being down significantly in many markets, interest rates remain low, and building costs are much lower than several years ago.

Make sure you understand all the costs involved. Interest, property taxes, dues and assessments, insurance, maintenance, and capital improvements can be significant. Some of these costs can be offset via rental income, but remember to factor in property management costs if you hire someone to handle this function for you. Also factor in the typical six to seven percent commission you'll pay when you sell.

IF YOU'RE LOOKING TO SELL

Maybe you already own a second home and now look at it as an extreme financial burden given the recent economic downturn and significant decrease in home prices. If you are in severe distress, then talk with a real estate attorney before falling behind on payments. A good attorney may know of ways to work with the bank to lower payments, work out a short sell, or at least make you aware of all of your options. Obviously, refinancing would be a first step, but doing so could be difficult if you don't have much equity in the home.

Examine every expenditure with a fine-toothed comb. Consider appealing the value on which your property tax is based. Doing so can be difficult, given the costs to hire an attorney or representative to help you with the process. See what your neighbors are doing. It may lower costs if you and they use the same attorney.

Make sure you are maximizing your rental income. If you have been using a management company, consider assuming this responsibility and using an online company such as Vacation Rentals By Owner ( http://www.vrbo.com). Social networking Web sites also offer a good way to spread the word.

Consider bringing in other owners who can help share the costs and upkeep. Make sure you are comfortable with each other and have an upfront agreement about everything from whether pets are allowed to renting to personal use. An attorney can advise you on the appropriate legal structure, which typically is a limited liability corporation.

Unfortunately, no easy answers exist. We can hope the second-home market will recover soon, but it is unlikely, given inventory levels and the fact that real estate prices were overheated in the middle part of the past decade. Sound planning should include optimistic scenarios as well as scenarios in which property values maintain their current levels for many years to come.

The author is a fee-only certified financial planner with Preston & Cleveland Wealth Management LLC (http://www.preston-cleveland.com) in Atlanta and Augusta, Georgia, and a member of the National Association of Personal Financial Advisors. The ideas expressed in this column are his alone and do not represent the views of Medical Economics. If you have a comment or a topic you'd like to see covered here, please e-mail meinvestment@advanstar.com
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