Should Snowbirds Buy Winter Nests?
When brutal winds and blizzards blow across northern and middle America, who doesn't dream of packing up and heading south to be warm for the winter? If you do that, your first encounter with the brilliant sunshine will promptly infuse you with Vitamin D and a mad desire to run out and buy your own place there.“It will be a great investment,” you assure your spouse. “We’ll have free vacations every winter instead of paying high rents, and when we can’t travel anymore, we’ll sell it and get all our money back and then some.”It’s the American dream of the 50-plus set. But it doesn't always have that happy ending.While there are many valid reasons for snowbirds to make permanent nests in the sun, if it’s simply an investment you are after, you would be better advised to accumulate a diversified portfolio handled by an experienced and trust-worthy financial planner.
If you are really honest with yourself and admit you are just looking for a place where you can leave your beach chairs and snorkeling gear and won’t have to deal with annoying agencies and individuals who handle seasonal rentals, however, you are starting with the right mindset.From there, you need to consider three essential components that will make your vacation home a good buy, defined as one that won’t cause you to lose money and which might yield modest profits someday.
From there, you are down to the three pivotal purchase points:
- Location factor.
- Taxation factor.
- Vexation factor.
When you buy a warm-weather hideaway with the idea of selling it again in the future, it’s wise to consider what most people think is attractive. For quick reference, that is beaches, mountains, and golf courses, although none of them ensure resale value. Beaches can get washed out by storm surges and golf courses can be abandoned by developers, so investigate weather patterns and the stability of the golf community management. Mountains are rarely moved.
The safest investment, location wise, is near a mega tourist attraction like Disney World or the Grand Canyon. For example, homes in the Kissimmee area of Florida which are near Universal Studios and Disney World have climbed up 35 per cent in the past year.
Next in importance to being in a high tourist zone is selecting a house in a well presented neighborhood. It doesn't have to be a rich street; just well cared for with lawns mowed, flowers planted, houses painted and fences mended. If you have a beautiful home but all the places around you look like time forgot them, your vacation haven will slide down in value.
Deciding who is going to live in your retirement home also impacts how good an investment it will be when it comes to taxation.
According to the IRS, whether you rent out your vacation home makes a big difference in your taxes. If you rent it for a maximum of two weeks each year, you can deduct your mortgage interest for the property, and fully deduct the home’s property taxes from your gross income.If you rent the home and use it personally as well, you can only deduct your operating expenses if you lived in the house less than 10 per cent of the days you rented it, or for less than two weeks. If you meet the criteria, you can deduct all your home operating expenses such as lawn care, cleaning, utilities and even property management fees.
The IRS has an excellent information sheet available on renting residential and vacation property. You can view it at http://www.irs.gov/taxtopics/tc415.html.
Remember that one of the reasons you fall in love with a particular warm paradise is that you are on vacation. The translation of that is you are doing as little as possible other than activities that help you enjoy yourself. You are sitting on beaches, enjoying fruity drinks with umbrellas in them, and dining out in pleasant restaurants.
What you are not doing is fixing drainpipe, mowing lawns, painting bedrooms and trying to repair broken air conditioning units.Investment is about your time and your happiness as well as your money. Do you want to spend your time in the sun ensuring that your “investment” holiday home is in good repair? How much vexation can you handle before what you thought would be fun turns into just another job? Do you love the community where your house is, or do you have a personality that gets bored easily and continually wants to visit new places? It’s often a good idea to rent for a longer period of time before you buy, just to make sure that you really do feel comfortable and contented in your holiday community.When you make up your budget to buy, are you adding in those vexing added expenses like new furnishings, home owner dues in various communities, and insurance costs?
Speaking of insurance, have you checked that the property is not in a flood plain or cannot be insured for some other reason? Many a snowbird has picked up a sweet little double-wide hideaway in a vacation community only to discover that the cost of insurance is so high that they will take their chances there will be no hurricanes for the duration of their ownership.
Setting Your Budget
If you consider all of these factors and decide a vacation home is still something you want to own, determine what you can afford to pay before you allow yourself to fall in love with a property.Consider if you will need to take out a mortgage on the vacation home and be aware that your down payment and mortgage interest can be higher on your second home than your principal residence. Check with your personal banker to find out how much money they can reasonably make available to you.Set a budget for home repair that includes an immediate emergency fund for thinks like leaky roofs or broken air conditioning systems.Another budget item is the cost of travelling to your vacation home multiplied by the number of times you plan to visit there each year.
Armed with this information, consult your financial planner to obtain his or her advice on how all of these factors will impact your overall wealth management plan.
Only then can you make a good decision on whether to buy or continue renting your vacation property.