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 Second
Homes
The New
Investment Option
If you are
considering buying a vacation retreat or second home, you are not
alone. A study last year by the National Association of Realtors
(NAR) revealed a record 2.82 million second-home sales in 2004,
up 16.3 percent from 2003. In fact, nearly a fourth of all homes
purchased last year were for investment, and another 13 percent
were for vacation homes.
What's Fueling
the Interest?
Since the September 11, 2001, terrorist attacks, more Americans
have turned to vacation retreats as safe, quiet alternatives to
resorts and crowded tourist destinations. However, according to
the Texas A&M Real Estate Center, the number of second homes
was rising even before 9/11. Center statistics also show that vacation
homes totaled 5.5 million in 1990 and 6.4 million in 2000, and could
reach 9.8 million in the next five years.
The most frequently
cited reason for purchasing a second home is to diversify portfolio
investments, however. Low interest rates mean more people can afford
second homes and, with second-home selling prices up 27 percent
since 1999, they are an attractive alternative to lackluster returns
on stock and other investments.
Who's Buying?
The typical second-home buyer is a baby boomer, 55 years old, with
a household income of $71,000, according to the NAR survey. "Because
the typical second-home buyer is a baby boomer, it's likely over
the next decade that second-home sales will remain relatively high,"
notes David Lereah, NAR's chief economist. "The boomers are
still in their peak earning years and have both the wherewithal
and the desire to purchase vacation homes and investment properties."
Lifestyle/Country
Living Purchasers
Farm Credit lenders say demand is strong for country getaways, and
that buyers typically fall into one of two broad categories. "Offices
close to population areas are experiencing high demand from 'lifestyle/country
living' purchasers," notes Robert Echols, senior vice president
with Heritage Land Bank, ACA in Greenville, Texas. "These buyers
typically are looking for a tract of land located close enough to
their workplace that they could eventually commute to work. While
their ultimate goal is to get out of the city and enjoy a country
lifestyle, the transitioning period often puts them in the 'second
homeowner' category."
Many build
a barn, shop or structure with small living quarters, which over
time is expanded into a permanent dwelling or converted to a guesthouse
or party room after the permanent home is completed.
Recreational
Land Buyer
The other common type of buyer is one looking for recreational tracts
that can serve as weekend getaways. "These are usually more
remotely located, with hunting and fishing as big drawing cards,"
Echols says. "These tracts typically are not within drive-time
for work commutes, and are usually larger tracts than the lifestyle
purchases."
Tax Incentives
Some second homeowners can reduce their income taxes by renting
out their vacation home. Tax treatment varies, depending on the
number of days the property is rented and the number of days of
personal use. "Potential purchasers should consult with their
accountant or tax preparer on the tax advantages of paying cash
or financing the purchase, and on the deductions from regular income
that can be charged off," recommends Echols.
Financing
Options
Just as the market for second homes is strong, so is the market
for second-home financing. "The vast majority of these types
of borrowers are financially strong, with good proven income streams,"
notes Echols. Farm Credit lenders are able to successfully serve
the second-home-buying market with competitive rates, flexible terms
and patronage dividends.
"Day in
and day out, Farm Credit can offer the most flexible packages with
the terms, structure and conditions that are a perfect fit for second-home
borrowers' needs. By capitalizing on the patronage refund and dividends
being paid by Farm Credit lenders, we are usually able to beat any
commercial lender's package," Echols says.
Other financing
options include owner financing, home equity loans, cash and IRS
1031 tax-free exchanges. "Many times these purchases are made
by multiple buyers, such as family partnerships or a group of friends.
By pooling their resources, they can acquire a larger tract of land
than would be possible individually," notes Echols.
Farm Credit
financing for second homes is based in large part on the financial
strength of the customer. Another important factor is how the property
will be managed: owner-operated, custom-farmed or leased out. Interest
rates and loan terms typically are similar to those for other Farm
Credit mortgage loans.
When considering
the best lender for your second-home purchase, don't overlook the
importance of convenience and local knowledge. "Local lenders
are more familiar with the area, have greater knowledge of land
values and local farming and ranching customs, and know local operators
who can look after the property in the owners' absence," says
Echols. "Purchasers should weigh all those factors, along with
the financing package itself, to select the best lender for their
situation."
Article
by Sue Durio
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