If the recent downfall of snow has you running to the slopes (or to a plane en route to warmer weather) don’t get carried away with the first possibilities of a recreational investment. Yes, there very well could be more potential rental days for cozy chalets near ski hills this year, but do the research before you take the leap to become a landlord.
There are certain basics to consider if you are going to make the most of your second-home investment. It’s easy to lose money on an emotional whim. Powder snow and picturesque mountains have ways of working wonders on the mind during a long weekend to “just check out the opportunity.” Lots of people can lose money in real estate — even in appreciating locales — so try and do the most to protect your hard-earned cash.
Making a profit anywhere — stocks, bonds, commodities, real estate, sales — requires basic understanding and research. Regardless of what you see on television, there is no secret sauce that will absolutely guarantee big-time revenue and success. Your return, however, will be gauged differently if you decide it is only for personal use and not necessarily for investment income. How can you put a price on experiences and memories? For now, let’s review some basics that are often overlooked in an emotional decision.
Picking your place. The three most-used words in real estate — location, location, location — are repeated for a reason. If the property will be solely a personal residence, will its style and layout hold its appreciation over the long term? Then think resale: If you had to sell in five years down the road, what would lure the next buyer? Finally, if you had to rent it out, is this the type of property that could definitely catch renter’s eyes and possible rental dollars? What appeals to just you may not appeal to the rental pool you may depend upon for consistent income.
Picking your community. Even if the house is perfect, is the neighborhood one that you see yourself enjoying? Do you think most of the people you know would like it too? Remember, you can always add a bedroom or convert a patio space, but the area is set. Again, play the dual role of renter and resident. If the parcel will eventually serve you and your family exclusively, you need to choose a place where you will be comfortable later in life.
Finding the cash. If you’ve got some semblance of a down payment and can show the likelihood of rental income, you are in better shape than you think. One of the biggest changes in real estate over the past five years has been the easing of financing. Lenders have simply made funds more available.
Tax is a benefit, but… While mortgage interest is deductible on second homes, it’s usually not wise to buy a home solely for tax reasons. If your property eventually becomes your primary residence, you can sell it after two years and pocket $500,000 of gain (married couple) or $250,000 (single person) tax-free. Sale of an investment property would not qualify for such a generous tax treatment.
Who’s minding the store? Before you invest in this wonderful getaway, you must decide how you will handle management. Having tenants, short- or long-term, will require that the property be managed effectively. It’s a business, unless you will be the only occupant. This means maintenance and improvement, as well as simple rent collection. You will either do it yourself, or you will hire others to do it for you. Management is a cost and will diminish your cash flow. Either you will spend your time to do it, or you will pay someone else. Choosing the more cost-effective approach will affect the return on your investment.
How much can you handle? Real estate that will ultimately prove a good investment because of price appreciation might be a challenge every month because of negative cash flow. You are responsible for paying for and maintaining your property regardless of whether or not the property is generating revenue. Before you invest, you need to create and hold a cash reserve to cover those weeks when the house is not rented, when the rent is late or when the toilet needs repair.
Tom Kelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border,” was co-written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on www.Amazon.com or get your signed copy at www.tomkelly.com.
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