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Ways of financing a second home (Snowbirding)
Old 01-01-2017, 11:26 AM   #1
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Ways of financing a second home (Snowbirding)

DW and I don't agree on many things, but we both like the idea of traveling to a warmer climate in the winter months.

We will start by renting, but I very much like the idea of purchasing a second home.

I don't want to start a discussion about buying vs renting. I'm interested in how others have financed a second home for snow birding, and how it worked out.

Our situation as we get close to FIRE (2018?):
- If we sell our existing home and downsize, we could come close to paying for two smaller places.
- We could potentially pay for a cheaper snow bird place and keep our home, but a majority of our savings is in taxed deferred accounts. I'm assuming a new smaller mortgage would be required to avoid a big tax hit from withdrawing a large sum.
- I lean toward spending most of our equity from our existing home on a nice place down south, and going low cost where we live now. DW isn't on board with this, but she might change her mind as we move forward.
- Is there some other approach that I'm not thinking of? Maybe a combination of downsizing and a smaller mortgage will be the final answer.

I would like to hear how others have accomplished this, and how it has worked out.

Thanks for your comments.


JP
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Old 01-02-2017, 07:57 AM   #2
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I think you are struggling with three questions. One is how much house to buy/how much to spend. Two is what type of house where. Three is how to finance.


The answer to one is based on total savings and expected expense level.
Ask your wife for the answer to two; it is just easier in the long run.
As to three, I think you clearly would not want to pay a penalty or extra tax to withdraw from tax deferred accounts. Beyond that, you would want to look at first mortgage and HELOC rates. I would have mentioned margin borrowing, but can't be done on tax deferred accounts, and would probably only make sense if you are already carrying $1 million in mortgage debt on the primary.
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Old 01-02-2017, 08:28 AM   #3
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If I were you, I would:

Arrange a long term rent your first snowbird winter.
Put your home up for sale at retirement
Search for snowbird purchase while in snowbird location
Search for downsized primary home anytime
I would try to sell primary home first, then buy downsized primary home
Then buy snowbird place if you have found one - if not then continue to rent.


I used post tax funds to purchase our condo 10 years before retirement. I'm now looking to downsize primary home, but the boss isn't on board yet. After I convince her to downsize primary, I'll probably upsize snowbird place.
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Old 01-02-2017, 08:30 AM   #4
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Have you zeroed in on where you want to go down South? Costs of housing vary so much in that area I don't see how you can make an informed decision. Living in MN myself there are many places that would be nice in the winter. Also don't underestimate the cost of an acceptable smaller place in the MSP area...that market is very strong right now.
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Old 01-02-2017, 08:37 AM   #5
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Not specific to your question, but I would caution you to consider the potential difficulty of obtaining a mortgage after you've retired. Banks don't generally understand net worth or care about how you plan to live off your portfolio, only cash flows. So if you don't have a pension and haven't started Social Security benefits (or this income isn't enough to qualify), you may need to think about financing before you retire.
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Old 01-02-2017, 09:16 AM   #6
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We've looked at buying a second house but always come back to renting being the cheaper/easier option. Consider the yearly costs of owning another house. Often times it is the same or cheaper to just rent a house or condo for the 4 or so months you may use it. Then you keep the down payment, etc. and don't have any maintenance issues.
Also when renting you can go different places as your desires change. Or health, etc.
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Old 01-02-2017, 09:21 AM   #7
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Originally Posted by JP.mpls View Post
DW and I don't agree on many things, but we both like the idea of traveling to a warmer climate in the winter months.

We will start by renting, but I very much like the idea of purchasing a second home.

I don't want to start a discussion about buying vs renting. I'm interested in how others have financed a second home for snow birding, and how it worked out.
I think you are mixing two different things. One is spending the winter in a warmer climate, the other is owning a second home. Why not just focus on the first, and investigate different options to get away from the winter cold?

If that leads you to buying a second home, then you can look at alternatives, financing and related matters.
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Old 01-02-2017, 09:44 AM   #8
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Owning 2 homes is a PIA . I own 2 Homes one near where we worked and a country /vacation home . The taxes upkeep community dues and utilities never end . We built our country home over several years and it is still not the way we want it . It is a small home but super efficient . Why own 2 homes this was an old northern urban myth .
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Old 01-02-2017, 09:50 AM   #9
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Are you sure you want to snowbird, rather than just moving to a warmer climate and staying there? Have you taken long vacation rentals in your intended winter location for several years, so that you know this is really something you want to do and that you love this lifestyle?

If so, then what I would do (if I was in your situation), would be to sell my present home and use the proceeds to buy two smaller, cheaper lock-and-leave type condos, one in each of the two locations. No need to finance since you will be downsizing so much anyway. Maybe you could buy one with a mortgage, and one in cash from the profit after selling your present home. Switching to small condos would eliminate many of the worries and upkeep issues for each home while you are gone. I would also sell most of the furniture and "stuff", and furnish each fairly minimally, because you won't be a permanent resident in either place.

Bear in mind that I have never actually done this. I prefer having a home in one location, and have chosen New Orleans for that location. But that is what I would do if I was determined to snowbird.

I would urge you to NOT do any of this until you have been retired for a couple of years or so. Often one's plans change radically after retirement. We planned to move to Missouri once we retired, but after retiring we decided to stay here. You could continue to rent down south in the wintertime for a couple of years after retirement and then revisit whether or not this is something you really want to do.
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Old 01-02-2017, 09:59 AM   #10
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Originally Posted by JP.mpls View Post
DW and I don't agree on many things, but we both like the idea of traveling to a warmer climate in the winter months.

We will start by renting, but I very much like the idea of purchasing a second home.

I don't want to start a discussion about buying vs renting. I'm interested in how others have financed a second home for snow birding, and how it worked out.

Our situation as we get close to FIRE (2018?):
- If we sell our existing home and downsize, we could come close to paying for two smaller places.
- We could potentially pay for a cheaper snow bird place and keep our home, but a majority of our savings is in taxed deferred accounts. I'm assuming a new smaller mortgage would be required to avoid a big tax hit from withdrawing a large sum.
- I lean toward spending most of our equity from our existing home on a nice place down south, and going low cost where we live now. DW isn't on board with this, but she might change her mind as we move forward.
- Is there some other approach that I'm not thinking of? Maybe a combination of downsizing and a smaller mortgage will be the final answer.

I would like to hear how others have accomplished this, and how it has worked out.

Thanks for your comments.


JP
Personally, I like your first option. However it sounds as if DW is not crazy about it. Would another option possibly be to use the equity in current house by getting a 2nd mortgage on that house, and then purchasing your place down south with that money?

I throw that suggestion out there because you asked for alternatives to what you've listed. I'm not sure I love it, but it does keep you in the place DW wants to stay (if I've understood you correctly).

My folks were very happy with two homes, one in Naples Fl and one in Cincinnati, Ohio, but they split their time about 50-50. As much as I dread the idea of renting, and having to find new places to rent, for me, as someone who only wants to be down south 3 months/year, it just doesn't make sense to own.

I think you are very wise to start out by renting. That is what we plan to do, if for no other reason than we just aren't ready to make a commitment to where we'd want to throw the anchor. Or if we want to throw an anchor at all.
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Old 01-02-2017, 10:51 AM   #11
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We learned a valuable lesson on owning two homes. Check into insurance coverage. It was extremely expensive, depending on the carriers that are available in the areas.
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Old 01-02-2017, 11:03 AM   #12
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Right it's not as simple as redeploying the equity from one big house into 2 smaller houses. It's the permanent cost of running 2 homes, the expenses of selling/buying 3 homes. The issue of finding the perfect house in the perfect location for snowbirding.

If you have children/grandkids in MSP it's deciding how long you want to spend snowbirding, the list just goes on. It kind of seems as though you are putting the cart before the horse talking about the best way to pay for it.
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Old 01-02-2017, 11:14 AM   #13
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We learned a valuable lesson on owning two homes. Check into insurance coverage. It was extremely expensive, depending on the carriers that are available in the areas.
Insurance is less expensive if you buy a condo - only pay insurance on the contents. Building insurance is covered by the HOA. At least in my case.
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Old 01-02-2017, 11:15 AM   #14
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DW and I don't agree on many things, but we both like the idea of traveling to a warmer climate in the winter months.

We will start by renting, but I very much like the idea of purchasing a second home.
I added bold above. How many places will you have to rent/explore before you find a place? It's not clear you have a destination or specific community in mind since you will "start by renting". Also, you have a 1 - 2 year window if you ER in 2018.

Depending on documented income, getting a mortgage after your ER might be more difficult, so it might be best to take out a HELOC before ER and park the cash somewhere until you are ready to buy. If you sell your primary home, you will have to pay off any mortgages/loans.
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Old 01-02-2017, 11:47 AM   #15
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Insurance is less expensive if you buy a condo - only pay insurance on the contents. Building insurance is covered by the HOA. At least in my case.
Probably true, I'm speaking of two SFH.
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Old 01-02-2017, 02:34 PM   #16
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I wanted to thank everyone for all of the comments. There really are many different things to consider as we proceed.
I also wanted to apologize for the poor grammar on the title of this post. I proofed my comments, and didn't notice the silly mistake in the title. "Ways of financing a second home".
Some follow up comments:
45th Birthday and Panacea,
I agree that getting a mortgage after retirement could be a problem.It seems like a logical approach to get a first mortgage on our main residence prior to retirement.I didn’t think about using a HELOC.Is there any big advantage or disadvantage of doing this?I have one of these already, but not large enough to purchase a second home.

Ronstar,
I like the sequence you laid out.A very logical approach.Have you been happy owning a second home?Where did you end up?

Ivinsfan,
I agree about MSP pricing.When we look at how much smaller homes or fix up places cost, it makes us want to just hang onto our place.

Folivier and Breedlove,
I know renting makes sense, especially when we are not set on a location yet.We tend to like getting settled into one area, and I still like the idea of upgrading and maintaining a place that we own.I know the thought of this makes most people cringe.

MichealB,
I have to admit I’m overthinking this. There are many steps to the whole process. Keeping it simple, and just getting down there into a 3-4 month winter rental will be a big step.We might find ourselves being content just renting.We certainly will find out if we like a specific area or town.

WR2,
One home makes great sense.Our ties to family and friends would stop us from moving away permanently.I like the two smaller places approach, and keeping our debt low.We are both more debt adverse than we should be, and this resolves that problem.I think the association fees for condos and townhomes are unreasonable, but I might have to get used to that idea. I do like the concept of being able to walk away from a property by just locking the door and going.

HadEnuf,
I think buying makes more sense the longer we would stay down there each year.I would have no problem staying in the warmer weather for 6-7 months.I think DW would agree if she likes where we are staying.
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Ways to financing a 2nd home (Snowbirding)
Old 01-02-2017, 02:50 PM   #17
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Ways to financing a 2nd home (Snowbirding)

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Ronstar,[/SIZE][/FONT]
[FONT=Calibri]I like the sequence you laid out.A very logical approach.[SIZE=3]Have you been happy owning a second home?

We've been very happy owning a second home. But most likely because it is a condo. Even though we have HOA fees, we have no maintenance responsibilities. So we have no more maintenance work than those with a single home. We are up to 33% of the year in the Arizona condo, and we do ok in it at 1300 sf as opposed to our 3800 sf primary house in Illinois. I can't wait to downsize the primary house, but haven't been able to convince DW. Eventually I see going down to 1 residence, maybe 10-15 years from now if all goes ok.
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Old 01-02-2017, 03:10 PM   #18
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Where is down there?, in our area Texas can be pretty popular and of course Florida...a decent 3 or 4 month rental in Florida will take some doing..not easy to come by. Even out here in Central MN we find that a 5 or 6 week break from Winter does the trick for us. We are always ready to get back home. What's the longest time you have been gone up until now?
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Old 01-02-2017, 04:14 PM   #19
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I think the association fees for condos and townhomes are unreasonable....
Oh, you do, do you? Have you surveyed association fees and compared them with common area expenses? Do you have evidence that HOAs are fleecing owners to line their own pockets? How do you suppose the complex is operated and the maintenance that you delegate to the HOA gets done? The condo fairy?

When you own a single family home, you organize and pay for the operation and maintenance of your home, or else you let it go to rack and ruin. A condominium is no different, except that you are sharing these expenses with other owners, and if the board is ethical, letting the place go to rack and ruin is not an option. Material upgrades involving significant capital cost need the owners' approval. But many owners want low condo fees above all else. When the roof needs to be replaced and there is nothing in the reserve fund, they will complain about the special assessment. This is why a reserve fund study/depreciation report needs to be conducted every three years or so. Anticipate, share costs equitably, and avoid nasty surprises.

When considering a condo purchase, an owner needs to do his or her due diligence by reviewing the board meeting minutes, the finances, the reserve fund, and the latest reserve fund study. It's wise to meet with owners too, to get a sense of the culture. When you move in, it's best to be engaged with the operation by attending the AGM, reading the minutes and reviewing the financial statements, and, if you believe that things could be improved, volunteering to join the HOA.

If you think all this is unnecessary, perhaps condo living is not the best choice for you.
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Old 01-02-2017, 04:22 PM   #20
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Oh, you do, do you? Have you surveyed association fees and compared them with common area expenses? Do you have evidence that HOAs are fleecing owners to line their own pockets? How do you suppose the complex is operated and the maintenance that you delegate to the HOA gets done? The condo fairy?

When you own a single family home, you organize and pay for the operation and maintenance of your home, or else you let it go to rack and ruin. A condominium is no different, except that you are sharing these expenses with other owners, and if the board is ethical, letting the place go to rack and ruin is not an option. Material upgrades involving significant capital cost need the owners' approval. But many owners want low condo fees above all else. When the roof needs to be replaced and there is nothing in the reserve fund, they will complain about the special assessment. This is why a reserve fund study/depreciation report needs to be conducted every three years or so. Anticipate, share costs equitably, and avoid nasty surprises.

When considering a condo purchase, an owner needs to do his or her due diligence by reviewing the board meeting minutes, the finances, the reserve fund, and the latest reserve fund study. It's wise to meet with owners too, to get a sense of the culture. When you move in, it's best to be engaged with the operation by attending the AGM, reading the minutes and reviewing the financial statements, and, if you believe that things could be improved, volunteering to join the HOA.

If you think all this is unnecessary, perhaps condo living is not the best choice for you.
+1...research is important I've heard of mortgages being refused on certain complexes after the lender looked at the functioning and reserves of the complex.we found when looking at an area that had lots of HOA, even some single family home developments, that it was difficult to compares apples to apples. Some of the higher costs HOA's were actually a better value as they included things like water bills, cable TV, trash pick-up and so on..Read everything about the HOA before you sign on the dotted line.
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