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Vacation / Future Retirement home
Old 01-25-2012, 09:50 AM   #1
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Vacation / Future Retirement home

I have need of some info.

Here the situation :

I own my current home without a mort. and I'd say it is worth about 200k . I am about 13 years from retirement. I want to retire to a specific area that is on the beach where home prices have taken a drastic hit ( like many areas ) . I also like to vacation at this same area in the meantime before retirement. I would like to take advantage of the low housing prices and go ahead and buy condo on the beach to retire to eventually and also have it to rent out and vacation at until retirement.

If I waited til retirement to purchase I would be selling current house and using that $$ plus 401k $$ to buy the condo at the prices that would most likely have recovered greatly by then.

I was thinking of downsizing my 4bdrm 3bath house anyways now so my idea is to sell the current house and use the $$ to buy the condo for cash. Then get a 30 year mortgage on another house that is smaller and cheaper.

I really wish that a bank would just allow my to retake out a 30 year mortgage on my current house and take the check and pay for a condo but I guess that is not possible? Instead it seems that about the best I can do is get a home equity loan and the term is too short for the payments to be comfortable.

If I sell my house and have 200K sitting in the bank will a bank give me a 30 year mort. on another house in my current area or do I need to purchase the condo in the beach area with that $$ before they will give me the loan ?

Thanks
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Old 01-25-2012, 10:01 AM   #2
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Usually banks only loan money to people who don't need it, with the notable exception of the subprime era a few yrs ago.

Its not a bad plan at all except that you'll be selling your house in a low market as well; but if your heart is set on that condo than I think go for it, especially if you're considering downsizing your current house anyway.
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Old 01-25-2012, 10:10 AM   #3
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Why can't you just get a mortgage to buy the condo?

If you don't have an existing mortgage, I can't imagine that you'll have too much difficulty in getting one for the condo, unless you've got income or credit issues.

Do you have any money for a down payment?
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Old 01-25-2012, 10:12 AM   #4
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Why can't you just get a mortgage to buy the condo?

If you don't have an existing mortgage, I can't imagine that you'll have too much difficulty in getting one for the condo, unless you've got income or credit issues.

Do you have any money for a down payment?
If I do this the rate will be higher I imagine as it will not be a primary place of residence and also I will not be able to deduct the mortgage interest for any time that the condo is rented out ...

By shifting the mortgage to a true primary place of residence I preserve the best tax situation I believe
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Old 01-25-2012, 10:29 AM   #5
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I would avoid letting the tax tail wag the housing dog.

I'm also not sure that you can't deduct the interest for a 2nd home. There are also tax benefits to renting, although it can get complicated.

It probably makes sense to talk to someone knowledgable about the tax rules in this situation.

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Originally Posted by militaryman View Post
If I do this the rate will be higher I imagine as it will not be a primary place of residence and also I will not be able to deduct the mortgage interest for any time that the condo is rented out ...

By shifting the mortgage to a true primary place of residence I preserve the best tax situation I believe
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Old 01-25-2012, 11:48 AM   #6
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Originally Posted by militaryman View Post
I have need of some info.

I really wish that a bank would just allow my to retake out a 30 year mortgage on my current house and take the check and pay for a condo but I guess that is not possible? Instead it seems that about the best I can do is get a home equity loan and the term is too short for the payments to be comfortable.
I would ask a number of banks and find out and not assume they will not.


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Originally Posted by militaryman View Post
If I sell my house and have 200K sitting in the bank will a bank give me a 30 year mort. on another house in my current area or do I need to purchase the condo in the beach area with that $$ before they will give me the loan ?

Thanks
I would also ask a number of banks and find out what they say.

I think that you have a great idea (buying now) with a 13 yr. window.

Good Luck
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Old 01-25-2012, 11:58 AM   #7
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Condos are great because you don't need to worry about stuff on the outside. The danger of condos are the maintenance fees that will slowly increase as the condo gets older. In addition to maintenance fees, you get hit with special assessments; condo needs a new roof, the porches are crumbling and need to be replaced, etc. My sister's condo assessed all owners ~$10k to replace all the concrete porches in the complex. I'm not against condos, I may get one myself in the future; you just need to know what you are getting yourself into.

Has anyone experienced these sorts of issues first hand with condos?
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Old 01-25-2012, 12:02 PM   #8
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Thanks! I understood about the monthly condo fees but was not thinking about the special assessments! That makes it sound alot riskier .... maybe I will just wait and rent a place each year and take my chances that they will not price themselves beyond my wallet in 13 years
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Old 01-25-2012, 12:18 PM   #9
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When we planned our retirement we considered a place at the beach but demurred because the salt air is corrosive, homes (condo or not) require a lot of maintenance. That is in addition to storm damage. IMHO, unless you have the equity to loose, you are better off renting.
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Old 01-25-2012, 12:42 PM   #10
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We've done almost exactly what you are talking about. Main home was paid off, bought a condo on a golf course near a beach. Rent it out now. Rentals have been great and we basically have the condo nearly for free now, after taxes. Total net cost to us is about what we spent on hotels in this destination anyway. Any equity/appreciation is essentially coming for free.

You need to talk with a KNOWLEDGEABLE tax person about the rental aspects. The rules are straightforward but, depending on how aggressive you want to be, there are some tax-court rulings that say you can do things the IRS specifically says you can't. We have not had to resort to this yet but it is something you should be aware of.

In our case we make a small cash profit every year but get a tax loss. You can only take a $3000 loss so it piles up. Much of the loss is generated by depreciation.

When you apply for a mortgage there are three choices: primary residence, second home, and investment property. You will pay a higher rate for an investment property but not (usually) for a second home. You'll also probably pay about 0.5% more for a condo loan and might need to meet a 70% LTV from what I've heard very recently.

You'll want to tread lightly on the short term renting aspects. Although it is perfectly legal in most vacation areas, it falls into an "iffy" category as far as mortgage companies and other financial companies are concerned. When we took out our mortgage we had no issues describing our condo as a vacation rental. But when we refinanced about a year ago we were specifically asked if the condo would be used as a "leased rental for terms exceeding 90 days."

Depending on where you are you might need to set up a business entity to operate the rental and handle hotel taxes. But that is generally very easy, again, depending on location.
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Old 01-25-2012, 03:35 PM   #11
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... You can only take a $3000 loss so it piles up. Much of the loss is generated by depreciation......

..
This is incorrect. If actively participate in rental income its more like 25K max losses that you can take.

See IRS pub 527 for details.
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Old 01-25-2012, 04:53 PM   #12
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This is incorrect. If actively participate in rental income its more like 25K max losses that you can take.

See IRS pub 527 for details.
Of course that's correct. The point is, there is a limit. It is not obvious that casually renting a second home would qualify everyone for the higher limit. But either way, we bought a condo as a place to stay when we visit and to eventually move to. We expected it to cost us a certain amount. The actual net cost has been far, far lower, not quite zero but close.
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Old 01-25-2012, 05:12 PM   #13
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Condos are great because you don't need to worry about stuff on the outside. The danger of condos are the maintenance fees that will slowly increase as the condo gets older. In addition to maintenance fees, you get hit with special assessments; condo needs a new roof, the porches are crumbling and need to be replaced, etc. My sister's condo assessed all owners ~$10k to replace all the concrete porches in the complex. I'm not against condos, I may get one myself in the future; you just need to know what you are getting yourself into.

Has anyone experienced these sorts of issues first hand with condos?
This is true of course. But that's where thorough investigation and due diligence is important. We dug VERY deep when we bought. We thoroughly ticked off the real estate agent with our demands. We went a lot further than most people every do I'm sure.

A condo complex should collect money into accounts to pay for new roofs, capital projects, and so forth. In my opinion a "special assessment" should almost always be viewed as an utter failure of the board, manager, and management company to properly manage the complex in advance of the need. In our case we investigated the management company before buying. We looked at the history of all the complexes they manage. This was admittedly much easier than it could be since we were dealing with a relatively small management company rather than one that had hundreds of buildings. In their 27 year history there had only been a special assessment at one of their complexes and only because of a natural disaster. You don't easily have access to the history of the management company but you can probably dig that up if you try hard enough. You do have access to the books and you should check the balances of the accounts for the complex before buying. Your mortgage company will, you should too. Put yourself in the position of owning the whole complex. If a storm hit, could you repair with what you get from insurance coverage (check that) and the balance in the account? If not, don't be surprised by a SA after a storm.

Maintenance fees will go up if costs go up. Here again, you can look at the history. They will also depend strongly on quantifiable factors. In Hawaii a concrete complex will have much lower fees than a wood complex for example.

Some other things you can do: hang out in the parking lot and talk to other residents. Talk to the staff - manager, groundskeepers, etc. Are they the type of people you want to be around? If you talk to residents and they are all complaining about something then there is a good chance it's a problem that might need to be addressed.

We had 4 complexes on our short list. We were able to eliminate 3 fairly quickly just by digging around and talking to people. We bought in the one that was left and are very happy after ~5 years. Two of the complexes we rejected have seen their maintenance fees skyrocket because of problems after an earthquake and the other one is essentially blacklisted for mortgages as we understand it because of management company issues.

There can always be surprises but I really believe many of then can be foreseen if you are willing to do some due diligence.
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Old 01-25-2012, 05:23 PM   #14
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Not offering advise, but just to let you know what we did (and how it turned out).

Bought a place in paradise (though not on the beach - maybe 3 miles away). Rented it out for 25 years and then moved there upon retirement (mortgage paid off by then).

We were lucky that we had very stable renters who always paid the rent and didn't tear the place apart. We charged rent way below the market for this reason. We DID use the place as a "business" and could deduct for depreciation. We were forced by state law to use a rental agent (since we did not live in-state) and this cost us 10%. Condo fees DID go up though we never had huge assessments (part of your due-diligence prior to purchase). Once we moved in and then sold (after 2 years) we got hit with depreciation "recapture" (be aware of that - we were, but still it's a shock with possible unintended consequences).

In addition to doing all your due-diligence, my "suggestion" would be NOT to plan on using the property for YOUR vacations. Try to rent it out FULL TIME and make enough that you can afford to travel to this general destination and stay in a rental yourself. You will make more rental money if you can keep it rented year round. There will be less hassles with ever-changing renters and you will not be stuck with a "schedule" for your vacations.

I think, in retrospect, we did lots of things right and a few things wrong. In total, it worked out for us, but I wouldn't discount the factor of "luck" in all of this. Keep in mind that if you purchase a property (even though you plan to vacation there or perhaps move there) it is STILL a real-estate investment. Does having two homes overcommit you to real estate at the expense of all other types of investments? Said another way, will you be sufficiently diversified if you own this investment? Only you can decide this for yourself. We made the decision based on our own situation (investment mix) and decided we wouldn't get hurt too badly even if the property did not work out. My "suggestion" is that you do a similar "what if" or "worst case" analysis LONG before you commit to more real estate in your portfolio.

Again, not an expert, just a guy who got lucky. So, as always, good luck and YMMV.
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Old 01-25-2012, 07:05 PM   #15
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We have a condo on a lake in Michigan. We do not rent it out. But we have been hit with sizeable special assesments over the past 7 years. Once for $8K to put in permanent piers, and once for about $1,800 when one of the buildings started sinking! But the good news is our HOA dues are only $130/month.
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Old 01-25-2012, 07:28 PM   #16
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When I think back to where I would have wanted to retire 13 years ago, well... buying a house there at that time would have been a disaster for me. 13 years is a long time, plans can change, and you may decide you'd rather be somewhere else by then. Another possible plan of action might be to invest the money for now, and buy the home later when you are ready to live in it. Just a thought.
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Old 01-25-2012, 07:31 PM   #17
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Originally Posted by militaryman View Post
I own my current home without a mort. and I'd say it is worth about 200k . I am about 13 years from retirement. I want to retire to a specific area that is on the beach where home prices have taken a drastic hit ( like many areas ) . I also like to vacation at this same area in the meantime before retirement. I would like to take advantage of the low housing prices and go ahead and buy condo on the beach to retire to eventually and also have it to rent out and vacation at until retirement.
If I waited til retirement to purchase I would be selling current house and using that $$ plus 401k $$ to buy the condo at the prices that would most likely have recovered greatly by then.
I was thinking of downsizing my 4bdrm 3bath house anyways now so my idea is to sell the current house and use the $$ to buy the condo for cash. Then get a 30 year mortgage on another house that is smaller and cheaper.
I really wish that a bank would just allow my to retake out a 30 year mortgage on my current house and take the check and pay for a condo but I guess that is not possible? Instead it seems that about the best I can do is get a home equity loan and the term is too short for the payments to be comfortable.
If I sell my house and have 200K sitting in the bank will a bank give me a 30 year mort. on another house in my current area or do I need to purchase the condo in the beach area with that $$ before they will give me the loan ?
Thanks
Hi, my name is Nords and I'm a real-estate addict.

I've seen a lot of pain over the years caused by people getting attracted to a plot of dirt with a structure on it. Instead of it becoming a "dream home", it becomes a money pit.

Hawaii regularly goes through a cycle of "OMG nobody will ever be able to buy a house here ever again!!". We watched a couple do this in the early 2000s. They sold their place and went in search of a bigger home but kept getting locked out of the deals. By 2006 they were sure they'd never be able to afford a home ever again and were doomed to a lifetime of renting. And, of course, in 2010 they picked up a sweet deal.

You could apply for a mortgage on PenFed's website. They want to see the salary/investment income to pay it off, not the assets. I don't know if they care about the specific reason for wanting the mortgage, but you might be able to get a good 30-year fixed rate on 70-80% LTV on your current residence. Would that put you in the condo? I know it'd give you a mortgage payment.

Let's say that you buy the condo. Now the pain & hemorrhaging begins, and you can probably make financial adjustments to handle that.

In the meantime, are you sure that 13 years from now you'll be the same person you are today? 13 years ago we were in a completely different home & life than where we are today, and we never saw our current life coming. In fact, I'm 51 years old and I've never lived at the same address for 13 years. (Gimme another 18 months.) Are you sure that you want to vacation in that area for the next 13 years and then spend the rest of your life tied to it by your real estate?

In the military we used to see junior officers buy a home "because real estate always goes up" or because "we're going to retire here someday". This has been a tradition since the 1960s. Ironically most of them have spent the next 20+ years hanging on to the place, renting it to other military, regularly refurbing & rehabbing it, never turning a profit. The homes have eventually reverted to the mean, appreciating at about the rate of inflation. I know one woman who's owned her "ensign home" for over 30 years, and she's still not planning to live there. But she finally has positive cash flow. If she was a financial type then I think she'd be aghast at how much money she's sunk into it over the decades. But she's always been a high-income worker who'd rather feel like she has a good investment (it's not).

If you look on VRBO.com and AirBNB.com, will you see many places in your beach community for rent? As another poster suggested, if you buy the condo then you should rent it out full-time (for more long-term income and better tenants) and rent elsewhere via one of these websites.

If you build a pessimistic spreadsheet of buying your condo and renting it out (including long-term tenants or monthly rentals) then you could figure out how much money you're going to pour into that property to maintain it for the next 13 years. My guess is that it'll cost more in the long term to buy that place now and "preserve" it until you move into it.

The condo real estate has crashed now, and 13 years is a long time. In the absolute worst case you could sell your current residence in 13 years, move to the beach, rent for as long as it takes, and swoop in at the next crash. My guess is that the current crash's prices will rise at roughly the rate of inflation for the next 13 years, pretty much like your current residence.

Don't get me wrong: buying there now would probably get you a good deal. But the issue is that you'd probably lose any of that potential appreciation with all the money & time that you'd have to sink into it over the next 13 years. And what happens if somewhere during that time your life takes a different turn?

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Thanks! I understood about the monthly condo fees but was not thinking about the special assessments! That makes it sound alot riskier .... maybe I will just wait and rent a place each year and take my chances that they will not price themselves beyond my wallet in 13 years
It will certainly keep your options open...
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