Final Stages of 2nd home purchase-Need Input

[sheehs1]

This is the first thread I have started. I value the opinions here and would like to ask you guys your opinions.

House:
Sound front with stellar views in desirable resort area on the Outer Banks
2600 square feet, 4 bedrooms, 4 baths, pool, 2 attached garages with ceilings high enough to park boats, 1/2 acre, 18 years old.
Proven rental income of $35K to $40K a year.
2010 tax value is $927,700. 1998 tax value was at $350K
Purchase Price is $520,000 (44% off current tax value)
(List price was $627, negotiated hard to get him down)
Probably will take $50K to fix some things as seller has not maintained
In need of repair work. May take more to make it what I want but can be done incrementally
Tax rates fairly low...even at the current $927K tax value, taxes are about $3,500 a year which is what I pay for my primary home in a rural town.

Loan:
Locked in a rate of 4.125% with 1/8th point lender credit day before yesterday.
Am putting 25% down. Wanted to put down more but...want my cash to make the repairs and renovations.

Monthly Expenses:
With mortgage, interest and other expenses, I calculate it will take $3,000 a month to carry. But remember the $35K in rentals to offset.

Assets
Total net worth not including my husband is 2.5M to 3M depending on how one values my percentage of family business.
Liquid assets total $1.2 M of that figure
Primary Home value based on current tax assessment is $320,000
Rest of net worth is tied to family business.

Income
My deferred comp runs out Dec 2013. Until then, I can carry both my primary home and this cottage and still save my K1 income from family business as well as the $21K of CD interest I am getting from my CDs as well as any growth (cough!) from my investment stock/bond portfolios.

When my deferred comp runs out, my income will drop $70K. Primary home will be paid off. But...I will have income north of $150K a year coming from investments and family business. I have calculated I can still carry both homes due to rental income netting out the expenses, contributions from my husband, monthly income from Board fees ..etc. I still should be able to save any growth (second cough) in investment accounts while using K1 from family business to pay down the mortgage and make IRA contributions every year.
My husband owns his "small" CPA practice.

Reason for wanting second home:
Quality of life for my family and myself. It would be wonderful to have a place like this to go with sound views and sunsets...where I don't have to board my much loved doggies and cat.
No expectations of fast appreciation. Double checked with a family friend CPA who told me not to go over $700K and to expect about 3% appreciation a year...once economy stabilizes.
Want to add some fun in my own life....and once I realized if I didn't do something to add to my life, I would simply be turning it all over to my daughter at my death. So what fun is that...right?

Contract

I have doen the inspection, a pest control inspection, a mold inspection and have set into motion a survey of the property and appraisal...that should be coming in next week.
There is a "due diligence" period in the contract that expires August 26th (next Thursday). We did not have a firm contract until 2 days ago and I have asked for an extention of the due diligence ...to run to September 12th...because I want time to ponder the other pieces of info due to come in. Have already decided that if the seller will not agree to that, I am canceling the contract....as I will not be pushed. It is likely he will agree or he risks my canceling. For ex: If the appraisal does not come in $50K north of the purchase price, I am likely to ask him to lower his price again...because I wont feel I got such a great deal given the condition of the house. Things like that. I want time "to ponder" it.

Questions:
1. Would you do this? Buy the 2nd home that is....with a million dollar cash buffer for retirement that could still grow while being able to save something too?
2. Would you put more than the 25% down keeping in mind that at 4% it is sort of "cheap money".

I'd appreciate all comments as this is a HUGE decision for me. Never thought I'd buy a second home. Seems to make some sense...to diversify some assets....as real estate will never be worth zero and there is a chance over the next 20 years it will appreciate. Thanks all and sorry this is so very long.!

 

[Nords]

1. Would you do this? Buy the 2nd home that is...
2. Would you put more than the 25% down keeping in mind that at 4% it is sort of "cheap money".

This is pretty much how we ended up with our current home, and financially it's worked out just fine.

You seem to still be figuring out whether you're renting out one of your homes for the income ("business") or making it easier to vacation with pets ("pleasure").

I'd be reluctant to lock up a bunch of cash in an illiquid asset with high transaction costs. The only "good" thing about a 25% down payment is a lower mortgage rate and no PMI.

So... how much will you be spending on hurricane insurance?

 

[sheehs1]

This is pretty much how we ended up with our current home, and financially it's worked out just fine.

You seem to still be figuring out whether you're renting out one of your homes for the income ("business") or making it easier to vacation with pets ("pleasure").

I'd be reluctant to lock up a bunch of cash in an illiquid asset with high transaction costs. The only "good" thing about a 25% down payment is a lower mortgage rate and no PMI.

So... how much will you be spending on hurricane insurance?

Nords...I'm doing both. We will rent this 2nd home from mid- May until September end with perhaps a couple of weeks in there for owner stays but will have the home to use the other months. March, April, October and November are particularly nice down there. At least this is the initial plan.

Home owners plus flood plus wind...is running me about $2,500 a year. Got 2 quotes and one company was $1,100 a year cheaper.

 

[SVHoper]

Small point:

In the small sample of valuations that I have had done recently, they seem to be super, super conservative: eg. $650k for a $750k current sell price property for refi... so I would not necessarily cancel the deal based upon the valuation, if you have done sufficient research on the area.

I don't feel qualified to advise you... but it seems you have considered retirement income; ongoing cashflow; and are taking a conservative approach to a second home - ie getting it to largely pay for itself So for me this comes down to a quality of life decision... and focusing on family seems a pretty good priority to me.

I just bought a walk to beach (not as good location as yours) mainly as an investment where rent covers 15 year mortgage payment plus a bit... and I can't see too much wrong with that decision... yet.

I hope you can arrange life and family to enjoy it... we are not quite that organized yet.

 

[sheehs1]

Thanks SVHoper..It is a quality of life decision for me...otherwise I would not be doing it. I might not cancel the deal based of valuation....but it may give me a point to...negotiate down a bit more on the sales price. Don't know. This seller is quite savy....but then I"m pretty hard headed myself.

 

[harley]

My biggest issue would be that those houses take a major beating nearly every winter, so I would make sure I have a realistic maintenance amount put aside. Sound frontage probably not so much as ocean front, but still. Not to mention the impact from the renters. We've rented down there, and while we were very considerate renters, I've seen others that have trashed the places, shoved hot tubs off the deck, practically burned the place down, etc. I personally wouldn't want to rent "my" place out. I'd either own for myself or do a straight rental property. But that's me.

 

[sheehs1]

Harley....I hear you and you are so right about "some renters". We also are considerate renters. May have to take it year by year. Income and expense projections indicate we don't "have to" rent....but the rental income certainly is nice and brings projections ....to the level of what they are just with this primary home.

I was feeling intense pressure from the real estate agents rushing the final week of due diligence. If the seller won't extend the time frame, I cancel. There are enough inconsistencies to make me nervous.
There is a big difference between repair quotes from my contractor and the sellers. Bank appraiser may be hooked into the agents down there..( even though they are not suppose to be.etc.)
So....I have spent the last couple of hours hiring my own independent appraiser (local to the area), forwarding him everything from the various inspection reports and repair quotes to have him do an appraisal on my behalf taking the condition into consideration...etc. I feel confident that it will be fair, objective and reasonable....and so will be able to determine if the price is on target or not from hopefully someone working in my best interest.

 

[kaudrey]

Well, I did it last year - bought a cabin in the mountains in WVA. Scale is much smaller than yours, but based on financials, probably about the same percentage of financial assets. We go out there about every other weekend, sometimes more, and I don't regret it for a minute.

 

[sheehs1]

Well, I did it last year - bought a cabin in the mountains in WVA. Scale is much smaller than yours, but based on financials, probably about the same percentage of financial assets. We go out there about every other weekend, sometimes more, and I don't regret it for a minute.

Love the mountains too kaudrey. Good for you! Thanks for your post...it really helps to hear what others have done. !

My husband and I keep our financial stuff separate. Married 18 years but blended family...that sort of thing. So...the financials are just mine. When I mentioned the family business....it is not his CPA practice...it is a multi generational business my Mother started in 1954. Point being...we have his CPA practice and his assets in addition to what I wrote above. I am more liquid than he is....meaning this cottage is "on my shoulders".... but with him helping.....so to speak.

 

[67walkon]

We have a second home in the mountains, but no mortgage on it. We don't want strangers staying there! Our thoughts were that we were better off investing the money in real estate than the stock market. We started building in 2008, had a completed house by the summer of 2009 and hope to spend about half the year there, starting in 2012.

I think real estate is a better, safer investment right now, especially if you are going to use it. There is no place I would rather go than our mountain home!

 

[rgarling]

Consider how long it takes to travel to your 2nd home. If it takes too long, you will tire of the commute. Owning something like that is good because it forces you to go and make use of it. It can be a nice thing for family gatherings and extended reunions. Financially, there are better investments that are less hassle (you will be maintaining this property). Also, when you get into renting you'll find that renters as a whole cause much more wear & tear on the property than your family ever will (not to mention you will feel unhappy at the beginning of every rental cycle).

 

[sheehs1]

Thanks for the reply rgarling and your points are well taken. This property is 2 hours away....out of my typical 1 hour runs to other cities so feel I will truly get a change of scenery without being too far. If it gets to the point that renters are causing anxiety for me...we will stop renting.. But...part of the reason for purchase is that it can generate income and carry itself. I could purchase something cheaper that is not waterfront...but that is not what we wanted. We decided early on to only look at water front type property in a good potential resale market. Otherwise, I probably would not do it. Still thinking about all of it....and as they say the deal "It isn't over till it's over?

 

[Delawaredave5]

Your numbers look similar to other 2nd home rental places I've looked at recently - right around cash neutral - with a good chunk down and with owner doing a fair amount of the management and maintenance.

Years ago these places were $30-60k negative cash flow per year - with the expectation that "appreciation would make that up and more".....

Hard to see any financial downside in your numbers.

If you don't mind the management and coordination and you are "anchored" to the area - seems like a fun project.

 

[sheehs1]

Thanks for the reply delawaredave5. This has taken me a long time with much thought back and forth....as I don't want to have buyers remorse. Both the bank appraisal and my own independent appraisal come in next week....so it will be after this that I make my final decision.
A couple of things have been happening that make me sit up and take "pause". As I said we are in the last week of Due Diligence. What that means is I can cancel at any time during the period. It runs out next Friday, the 26th (I think I said Thursday in an above post but I had the day wrong). Oddly enough, the seller has taken himself "out of pocket"...mining for gold in Wyoming...during this very critical week of negotiations. I don't know whether to think it is a tactic to eat up some of the final days of my due diligence....or...just a coincidence. We've asked to extend the due diligence to September 12th and can't get a response from him until the day before due diligence runs out. So...for all reading..."Why would a seller take himself out of communication range unable to continue to negotiate at this critical time"?. Doesn't make me comfortable and have felt tremendous stress from this ...as there are more answers needed.
Second, after I signed the last contract offer last week, my own real estate agent called and asked me about the amount I was putting down. I told her I had not decided...and one of my next statements was "Isn't that between me and the bank?". Just odd...and I think she crossed a personal boundary there with me, as the original amount I intended to put down was in the contract. Although it has changed since the property needs some repairs. Is this at this point really any of her business? .
Next....is...I had a long discussion with my banker to get a feel for how long we should extend due diligence based on appraisal time, his vacation time, my own time to ponder...etc. I relayed it to my agent and who relayed it to the listing agent....and they obviously questioned my statements. Obviously they do not want to extend due diligence and I was beginning to feel like I was in a pressure cooker. Long story short my agent actually called my banker to discuss with him. I thought that too was crossing a boundary. Quite honestly, it pissed me off.
We went to see the property last Tuesday. There were renters there and we had to get permission. We had been told this renter might be interested in the property. I don't know if that is true or ...another "closing" tactic...to make me think the property is desirable. (Only 5 properties have sold in this particular area this year - so hello) . My agent told me yesterday that she left her card for him and she just might call him to feel him out...to see if what we were told is true. I rather think....she is lining up another possibility in case the deal with me falls thru or ...to be able to emphasize with me the property is desirable. Again...I thought her actions might be crossing a boundary...at least with me anyway. What do you guys think? Pressure tactics or just me being super sensitive since we are getting close to the end?. BTW...all of the above...is what made me want to get my own independent appraisal while giving the appraiser copies of home inspection, mold inspection, buyer repair quotes and seller repair quotes...and to do the appraisal with my best interest in mind...(i.e., not the agents and not the bank !)

 

[kcowan]

I think you are sizing up the situation correctly, sheesh, so stik with your gut!

My DIL has purchased a similar deal last month. Prime rental season is summer when she is off her teaching job. So she is doing the property manager thing (it is only half-hour drive from their home in the city). I consider it to be a high risk endeavour but if it works out as planned, they will be much better off in 10 years.

 

[Hobo]

Well, let me comment and I hope I don't cross a "personal boundary". I have invested in property all my life, lost some money but made a lot more. I also owned a second home in the mountains of Southern California.

First, let me observe that you are obviously a very thorough person who tries to collect all the facts. Then you want to plug them into a formula which yields the final answer. Real estate doesn't work that way.You are trying to "read the seller" and read your own real estate agent. None of that is important. This is not a poker game where you can read faces, this between you and the house. So forget the psychoanalysis.

This is a vacation home, it is a luxury, and a large amount of money in a single property. It is not a tax shelter. You can take a few deductions for the time renters are in the house, but IRS doesn't allow you much. Money is made in real estate when the price of property appreciates.

It sounds like you expect to keep this house forever. So you don't really need to make money on the house. If it goes up fine, or down a little more - well, damn. At this time the future price of housing is impossible to predict. But if you want a little statistical analysis, here is a great website I have used for years to look at house prices and the direction they are headed. See how easy it was to identify the real estate bubble long before it happened?
New York City Housing Bubble Graph: Charts of inflation-adjusted, historical home prices.

You need to first focus on the true income and true expenses. I believe you will find that tenants are really aggravating to have in your house. They will do damage because renters don't care. I suspect you will give up that idea after you try it a couple of times. For a house in paradise, you don't want to spend a lot of your time talking with handyman. Renters are a great irritation factor, something you don't need in your dream house.

Here what I suggest you consider: No income from rents. No tax breaks. You can calculate the annual cost of mortgage + taxes + maintenance expense + all the rest. This your true cost of ownership. That is the monthly cost of owning a luxury house to congratulate yourself on leading a successful life. You could just as easily buy an expensive Jag or Rolls. If you have to ask "can I afford a million dollar second house?" - then the answer is no.

The final point is something I call the "zen factor" - vital to all decisions. You have to stand back alone and examine how you really feel about the property free of all earthy influences, such as money. Purely metaphysical analysis. Does this house and its surroundings appeal to you. Is this house going to make you contented in life?

This is important. I have seen some excellent real estate that looked like a real bargain on paper. Then I realize... this house just is not appealing to anybody. The trees are ugly and it looks fat and ugly from the street. Or the neighborhood is not my style, etc. Will you be contented in this special house or will it just become only a big drain on your income?

After this, you should your answer and be comfortable making a decision. If you are still uncomfortable, then subconsciously you know is something wrong.

That's the way I see it

 

[sheehs1]

I think you are sizing up the situation correctly, sheesh, so stik with your gut!

My DIL has purchased a similar deal last month. Prime rental season is summer when she is off her teaching job. So she is doing the property manager thing (it is only half-hour drive from their home in the city). I consider it to be a high risk endeavour but if it works out as planned, they will be much better off in 10 years.

Thank you kcowan. I think I am sizing it up correctly as well. Does it matter? I think it does and that makes it important to me.

 

[sheehs1]

Real estate doesn't work that way.You are trying to "read the seller" and read your own real estate agent. None of that is important. This is not a poker game where you can read faces, this between you and the house. So forget the psychoanalysis.
Not really trying to psychoanalyze here Hobo. It is hard to deny the dynamics of the endeavor. I feel if one doesn't keep ones head about her/him, one can be swept along with the motivations of others. That is all I'm trying to avoid ...and is pertinent to your words further along below. about the "zen factor". I'm trying to shut out all the noise and get to "what I really want".

This is a vacation home, it is a luxury, and a large amount of money in a single property. It is not a tax shelter. You can take a few deductions for the time renters are in the house, but IRS doesn't allow you much. Money is made in real estate when the price of property appreciates.

It sounds like you expect to keep this house forever. So you don't really need to make money on the house. If it goes up fine, or down a little more - well, damn. At this time the future price of housing is impossible to predict. But if you want a little statistical analysis, here is a great website I have used for years to look at house prices and the direction they are headed. See how easy it was to identify the real estate bubble long before it happened?
New York City Housing Bubble Graph: Charts of inflation-adjusted, historical home prices.
Thanks for this...I will most definitely look at this link and save it for future reference
You need to first focus on the true income and true expenses. I believe you will find that tenants are really aggravating to have in your house. They will do damage because renters don't care. I suspect you will give up that idea after you try it a couple of times. For a house in paradise, you don't want to spend a lot of your time talking with handyman. Renters are a great irritation factor, something you don't need in your dream house.

Here what I suggest you consider: No income from rents. No tax breaks. You can calculate the annual cost of mortgage + taxes + maintenance expense + all the rest. This your true cost of ownership. That is the monthly cost of owning a luxury house to congratulate yourself on leading a successful life. You could just as easily buy an expensive Jag or Rolls. If you have to ask "can I afford a million dollar second house?" - then the answer is no.
I've done all these calculations and while I can carry it...without renting...I would rather have it net itself out...or to at least try it for a while. Am asking myself..."OK if I rent it, just when will I use it and am I o.k. with that...etc. "

The final point is something I call the "zen factor" - vital to all decisions. You have to stand back alone and examine how you really feel about the property free of all earthy influences, such as money. Purely metaphysical analysis. Does this house and its surroundings appeal to you. Is this house going to make you contented in life?

This is important. I have seen some excellent real estate that looked like a real bargain on paper. Then I realize... this house just is not appealing to anybody. The trees are ugly and it looks fat and ugly from the street. Or the neighborhood is not my style, etc. Will you be contented in this special house or will it just become only a big drain on your income?

After this, you should your answer and be comfortable making a decision. If you are still uncomfortable, then subconsciously you know is something wrong.

That's the way I see it

Good advice and appreciate the time you took to write it . This is what I have been focusing on the last couple of days.....like I said ..."shutting out the motivations and noise of others involved in the process to get to what I want. But...isn't it pertinent that to be able to do that one has to first recognize that the motivations of others exists, know how, in what form and why they occurred and be conscious not to get swept up? That is why I relayed... what I call oddities with the seller being out of pocket and my agent crossing boundaries.

 

[Hobo]

Good advice and appreciate the time you took to write it . This is what I have been focusing on the last couple of days.....like I said ..."shutting out the motivations and noise of others involved in the process to get to what I want. But...isn't it pertinent that to be able to do that one has to first recognize that the motivations of others exists, know how, in what form and why they occurred and be conscious not to get swept up? That is why I relayed... what I call oddities with the seller being out of pocket and my agent crossing boundaries.

I don't need that kind of information. The price speaks for itself. Personally, I would prefer a grumpy seller who stays out of the way. I can't imagine what he can pull on you. Real estate is highly regulated and you have done inspections to make sure you are aware of any the physical problems - like leaky roof, failed septic tank, etc.

Your real estate agent is crying because (from what I read) he/she is missing out on quite a large commission during hard times for a RE agent. I think your agent was just trying to start a conversation to find the details of the deal. It is kind of like wanting the hear the latest gossip. I don't care!

 

[sheehs1]

Hobo...got it. You don't care and don't take that into the equation. You've done a lot of real estate. I suppose having not done this since 1993...has made my learning curve a bit longer. But I learn fast... Thanks again. Especially for the link. I've been reading thru it..

 

[tryan]

Here's a few hard numbers on our lake front vacation rental:

gross rent: 37k

maintenance : 12% (of gross rent)

Utilities : 15% (winters are harsh)

management (cleaning / linens mainly): 10% (use homeaway and vrbo to rent ourselves)

taxes (property and state hotel tax): 29% (ouch!)

Doesn't leave a whole lot to pay a mortgage. We've been doing this 5 years. Haven't made a penny. But it carried itself last year (for the first time). And we enjoy dual season (ski in the winter, lake in the summer). So it works for us.

 

[sheehs1]

Wow tyron...those property taxes are indeed high!

Running percentages on my estimates things look like:

Gross Rents = $36,000

Property Taxes = 10.2%
Homeowners Insurance = 7.1%
Mortgage = 46.8%
Water Expense = 2.2%
Utilities = 10.0% (and I calculated higher than what the seller had)
HOA Fee = 0.7%
TVInternet/Phone = 4.8%
Pool Maint = 3%
Yearly Repairs = 6.6%
Yearly Supplies = 3.3%
Total = 84.8% If I don't rent

Property Management Fee = 18% (cleaning is included in %)
Total = 102.7% If I do rent


In order to get these percentages I'm going to have to put more down on it ...more like 44.2% down....rather than the original 25%. Still trying to decide.

There was a really good article on the link Hobo gave me...on how to identify whether the price is a good price for purchase with rental in mind.
annual rent / purchase price = 3% means do not buy, prices are too high
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy, prices are reasonable

I'm at 6.9% ....so...borderline......
Yes...want it for qualify of life...but also don't want to overpay....

 

[Hobo]

I had a house near the beach years ago and tried to rental it out as a serviced vacation rental. It required more management effort on my part than I ever managed. You are running it like like business, so you need some maid service and gardening service. Management agency to keep tract of the comings and of guest. You must have someone be available to make emergency repairs such as if a tree falls on the driveway and takes down some overhead wires with it.

I came to the conclusion that I would be far better off to have 3 rental units each 1/3 the size of the house. In other words, cut my house into thirds. I had a full array of services for one unit. The total rent would have been much greater with 3 units and my expenses of my house would be less overwhelming. I thought a long time how to do that, but it was not possible to split it up like a bed and breakfast. But now I have a much better idea why a two or three units are so much more profitable.

 

[LightningDawg]

We too had rental condos. One in a college town and one at our local beach. The college condo was rented out full time. The beach condo was rented out most of the time. We used it approximately 2 weeks a year.

It turned out to be more hassle than it was worth. We couldn't just go to the beach condo whenever we wanted to. Invariably, we got called because something broke or something was missing or whatever. And the real estate taxes were high.

We decided to sell both, and pay off our primary home. If we decide to go to the beach for a vacation, we can always find a place to rent. This works for us.

 

[sheehs1]

LightningDawg...your post made me remember why I sold out a 25% interest in an ocean front beach cottage back in 2003/2004. Not only did multiple ownership not work but...it either just barely or didn't pay for itself. A lot of work for a week at the beach and didn't seem to justify having that asset sitting there subject to hurricanes...etc.
Every summer...I get that wistful...desire to have a place at the beach. With our children all out on their on....I'm now wanting a place I can get away to and take my animals etc.
Still I'm cognizant ....that ..it wil take some time to pay down the mortgage, and by then, if not before, it will need a new roof, 2 new heat pumps...etc. and that it will take time and effort to manage.
Hobo...I too see why 2 and 3 units under the same roof would be more profitable.