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Buying a Beach House: Things to Consider

Buying a beach house

Coming out of a dreary winter may have you dreaming of sand, surf, and sunshine, but buying a vacation home is no day at the beach. High insurance rates, storms and renter wear-and-tear can put a dent in the glamour. Plus, recent tax reform legislation took a bite out of some of the old advantages. Like any investment, approach buying a beach house with care and caution.

What to ask yourself before buying a beach house

Here are some key questions to ask before taking the plunge.

Can you afford a second home?

Before buying a vacation home, make sure the rest of your finances are in good shape. In other words, you don’t have a lot of consumer debt, you’re saving enough for retirement and you have enough cash on hand to cover the down payment and closing costs, ongoing mortgage payments, property taxes, and maintenance, plus some money left over to cover unexpected repairs.

Twice the fun. Do you feel comfortable covering the costs of owning two homes? The average price of a vacation home in 2017 was $200,000, according to the National Association of Realtors. But we’re not just talking about the sales price. There can be a lot of associated expenses you must factor into the equation.

Nelene Gibbs, owner of a real estate company in Virginia Beach, Va. and a beach house in the nearby Outer Banks, says many beach homes need a lot of work and new furnishings. “It’s important for buyers to have funding beyond the purchase price, down payment and money to pay the mortgage,” she said. She also cautions that sellers are rarely willing to pay the buyer’s closing costs in a beach property transaction.

Can you deduct the interest on a second home mortgage?

The majority of vacation home buyers rely on financing rather than paying cash, according to the National Association of Realtors. That’s not a bad idea, considering the interest you pay may be tax-deductible. Buyers can claim the mortgage interest paid on their primary residence and one other home as an itemized deduction.

But thanks to the new tax law, taxpayers may only deduct interest on mortgages up to $750,000 (down from $1.1 million prior to tax reform). Example: Say you take out a $500,000 mortgage to buy your primary residence, then take out a $200,000 mortgage to purchase a vacation home. Interest paid on both loans would be deductible, as the total balance is less than $750,000 and both of the loans were used to buy, build or substantially improve the home.

A piece of bad news for those planning to use the equity on your main residence to purchase a second home: You cannot deduct interest paid on a home equity loan that is used to buy that beach house.

Given the complexity of tax considerations, consult your tax professional before buying so you fully understand any potential benefits or downsides.

How much use will the property get?

Do you plan to use your getaway place for vacations or as a source of rental income? According to the National Association of Realtors, 42% of buyers plan to use the property as a family retreat. If that’s your plan, consider how often you’ll actually be able to use it. Is it an easy commute from your primary residence to your vacation home? One you’re willing and able to take every long weekend?

Gibbs, in Virginia Beach, says in her experience, most buyers have vacationed at their preferred spot for several years before deciding to purchase. “I suggest they be within a two- to four-hour drive of their destination, which is usually a manageable drive for a long weekend,” she said. “I’ve found that if they’re much further out, they won’t use it as often as they think they will.”

Will you use it as a vacation rental?

Many beach house buyers plan on renting out the property when they’re not using it — 37% expect to generate income, according to the National Association of Realtors. This can be a good strategy for offsetting costs, but it’s not as simple as it sounds.

“Vacation rentals tend to be severely abused during the vacation season,” Gibbs said. “I’ve found many property management companies don’t put a lot of effort into keeping them as clean and updated as they should.”

Carole Cancler, a Washington state resident nearing retirement age, purchased a vacation condo 20 years ago in Kona, Hawaii after renting in the area for years. She rents out the property when she isn’t using it. “Just replacing and repairing minor things can really add up,” she said. “New things get broken. Other things go missing. Things wear out faster at the seashore.”

Rents help pay her homeowners association dues, but some years that income still doesn’t cover her expenses. “Things always cost more than you think,” Cancler said. “If your situation is financially tight, it won’t be alleviated by renters.”

Other considerations before buying a beach house

All of that sun and sand is great, but owning a beach house brings costs you may not face back home:

Condominium/homeowners association dues

High dues came as a surprise for Cancler. “Management fees are a lot higher for a location with a pool, extensive grounds maintenance and oceanfront upkeep for saltwater and winter storms,” she said.

Storms/hurricanes

David DiNatale, a real estate attorney and owner of Capital Funding Financial in Parkland, Fla., says buyers, especially on the Eastern Seaboard, should consider the risk of storm surges and rising sea levels in the event of storms. “It’s crucial to ensure the property was built to withstand a direct impact from a major hurricane and the storm surge that comes along with it,” DiNatale said.

He says to be mindful of the year built and type of construction before buying a home. He says many homes built in or before the 1980s were built with wood frames, which are extremely susceptible to damage from wind and storm surges, thus costing more to insure and repair. He recommends looking for properties with a concrete block frame, a well-maintained roof, and high-impact storm-resistant windows.

Erosion

Property near the ocean is vulnerable to erosion as waves and currents remove sand from the beach. Due to rising sea levels, beach erosion has become a serious concern for coastal properties and infrastructure, such as roads and homes.

Buyers of beachfront property aren’t always notified about the risk of erosion and erosion rates in certain areas. Before you buy, you may want to contact the county planning department or other local governmental organization to check erosion rates. You may also consider hiring a private company to analyze shoreline hazards.

If erosion threatens the property, you may need to consider moving the residence landward, look into bringing in sand to replenish the beach or building a sea wall to stop the loss of land from erosion – all strategies that may come at a significant cost.

Many coastal areas periodically replenish their beaches with sand dredged from offshore. Historically, the federal government has been a major source of the funds necessary to complete these replenishment projects. But increasingly, communities are pushing more of the costs onto property owners in these areas.

Higher insurance rates

Gibbs says the cost of flood insurance can be a concern, especially for owners of oceanfront property. “It can be prohibitively expensive,” she said, “running as much as $10,000 or more per year for properties close to the ocean. Across the street, the cost of insurance can drop as low as $675 per year.” For this reason, Gibbs suggests cost-conscious buyers consider buying property one street away from the beach rather than actual beachfront property. “You can still have ocean views without the great cost of insurance,” she said.

Local rental agent

In Hawaii, where Cancler bought her beach house, property owners who live off-island and plan on renting out their property are required to hire an on-island agent to collect rent and taxes and serve as an emergency contact.

Rules governing who can manage your property and collect rents and taxes vary by location, so make sure you understand the requirements in your area before you buy, and then budget for that expense if you plan on renting the beach house when you’re not using it.

Getting a mortgage on a second home

Gibbs says getting a mortgage on a beach house doesn’t differ greatly from a traditional loan. “The biggest decision for buyers is whether it is being bought as an investment property or being bought as a second home,” she said.

With investment homes, most lenders require a 20% down payment. “However, I have had clients buy beach homes as a second home with as little as 10% down,” Gibbs said.

But coming up with a down payment isn’t the only challenge you may face when buying a beach house. Gibbs says because beach houses are often second homes or vacation rentals, inspection issues that impact the appraisal are common. “Unfortunately, in many cases, there is a lack of maintenance and upkeep,” Gibbs said. “With them being located close to the beach, there can be moisture issues and wood rot, which is not always visible in routine inspections. I’ve seen homes that had to be gutted right down to the studs and everything replaced due to moisture issues that have been let go for many years.”

Financing options
Pros Cons
Cash
  • Avoid paying interest and other costs
  • May deplete cash reserves needed for repairs or furnishings
Conventional loan
  • Interest may be tax-deductible
  • Property may not qualify if it needs extensive repairs
  • Closing takes 30 to 60 days, depending on the lender
Private lenders
  • Often available to people with credit issues who can’t get approved for a conventional loan
  • The approval process may take just a couple weeks
  • Shorter payback period – typically no longer than five years
  • Higher interest rates than conventional loans
Seller financing
  • May be available to buyers who’ve been turned down by traditional lenders
  • The closing process is faster and cheaper than that of a conventional loan
  • Down payment amount can be whatever amount the buyer and seller agree upon
  • Higher interest rates
  • Typically shorter term than conventional loans
  • May require a “balloon payment” after five years

Interest rates

DiNatale says the interest rates and fees for a mortgage on a vacation home are typically higher than what you’d see for a primary residence due to the risk of default — from the lender’s perspective, it’s a riskier bet since the borrower doesn’t live there.

In Hawaii, Cancler says she’s ready to sell her vacation place. While she once imagined retiring here, at least part-time, she’s found that there aren’t enough services or activities in the area. Still, Cancler says she doesn’t regret the decision to buy all those years ago. “We had lovely family vacations there,” she said, “but we’re ready to move on.”

 

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