Buying a Second Home

Ray’s Take: Buying a second home for personal use or as an investment has become one of the fastest-growing trends in the U.S. According to the National Association of Realtors, more than 30 million Americans are expected to enter the second home market in the next decade.

 

You may think since you’ve been through the homebuying process before, that the second time around should be a piece of cake. Think again. Typically, second home loans require a better credit score and more money down. Lenders will be looking carefully at your finances to see if you can actually afford to pay two mortgages. They will want to make sure your debt does not exceed 40 percent of your gross income.

 

Also, be prepared for a higher mortgage rate to the tune of one-quarter to half a point. You will probably not get as competitive of a rate as you did on your first mortgage.

 

Buying a second home can actually be more expensive than you think. Make sure to review your overall budget with a second mortgage in mind. You always need to maintain a healthy emergency fund if an accident or job loss forces you to float two mortgages at the same time.

 

In addition to the mortgage, don’t forget about all the additional expenses that come with owning another home. This includes utilities, property taxes, maintenance fees, general upkeep and insurance.

 

For many second homeowners, renters can help offset a lot of expenses. One good thing about buying a second home is that it can actually help you out on your taxes if you live in it more than 14 days per year. You can deduct your real estate taxes and mortgage interest, as long as your combined mortgages don’t exceed a million dollars. If you rent it out for more than 14 days, you will have to report the income to the IRS, but you can deduct some expenses too.

 

Always consult with your financial adviser before considering purchasing a second home.

 

Dana’s Take: Ray and I have debated the idea of buying or renting a second home, versus staying in a hotel. Ray favors hotels and does not want to buy a second home, as one home gives us enough headaches. He is open to renting a second place someday, but even that could be problematic when you don’t live there permanently.

 

Today, with Airbnb and HomeAway, more vacation homes offer long-term rentals. Some people rent their places for a minimum of two weeks, and a hotel in London now offers rooms for months to world travelers.

 

The hotel option usually wins because of the flexibility. But I wonder if someday people all over the globe will move away from short-term rentals.

 

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Teaching Your Kids About Money

Ray’s Take: Did you know that only 17 states require high school students to take a course in personal finance? Unfortunately, financial literacy is often left out of the American education system and it’s up to parents and guardians to teach kids everything they need to know about finances.

Teaching your children financial literacy skills should start early and it’s one of the greatest gifts you can give your children. Many adults I work with who struggle financially do so because they were not taught basic financial skills growing up or were raised by adults who did not demonstrate responsible spending or saving habits.

“It’s actually easy to teach kids about money,” says Jayne A. Pearl, an Amherst, Massachusetts-based author of “Kids and Money: Giving Them the Savvy to Succeed Financially.” “Turn your day-to-day activities into learning experiences. Trips to the bank, store or the ATM machine can be a perfect opening for a discussion about your values and how you use money. When children are very young, you can work money concepts into your child’s imaginary games, like playing pretend store or restaurant.”

Teaching your kids the difference between wants and needs is a great place to start. Even the youngest children can differentiate between a want and a need. You need food and clothing, but you want a toy. You shouldn’t buy something you want unless you have taken care of your needs. Even we as adults forget this basic money management skill.

You can also help your children develop financial muscles by not purchasing every item they request. Even more powerful is demonstrating this skill in front of your children by avoiding impulse purchases yourself. When my kids saw something they wanted, they would ask me to “loan” them enough money to buy it on the spot and take it out of their savings account later. I would offer to take them to the bank to get the money out first. By the time we got to the bank, the craving usually passed.

Remember that teaching children about money can’t be accomplished in one conversation. It will take years and years for them to understand all the money management concepts. So start your journey early and never stop.

Dana’s Take: The best way I learned about money as a teen was by earning a paycheck.

Most teenagers today do not work for a paycheck. After-school sports, homework and exotic vacations seem to have taken the place of a “J.O.B.” Babysitting and cutting the grass are about as rare as a pop song with no explicit lyrics.

Ray and I are guilty as any parents of letting teen privilege get in the way of our kids’ employment. Maybe this year, a job will be that exotic “summer experience” they were seeking.

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Renting vs. Buying

Ray’s Take: Buying a home used to be the pinnacle of living the American Dream and the trophy of your financial success. Conventional wisdom held that you either paid your own mortgage or someone else’s. 

But in recent years people are questioning whether to buy that starter house or just wait to buy the dream house they will live in for 40 years. A new generation is choosing to rent instead of buying, and they may be on to something. 

Most often, people choose to rent because the housing in the area is simply too expensive. But there are some other reasons that prove the logic of renting over buying. 

Having flexibility is a great reason. If your job transfers you often or if you prefer to explore different areas and locations of the city, renting is probably the way to go. When you are a homeowner, it is much more difficult to relocate because of all the fees associated with buying and selling a house. If you have had a real estate closing, take a hard look at that settlement statement. There are a lot of hands out. 

People also choose to rent to save money in the short term. Renting should allow you to save more for the down payment needed to purchase a home. You also avoid real estate taxes and maintenance and repair costs that come with owning property. 

On the other hand, if you plan to stay in the same place for more than five years, buying a home could be the smarter choice. Staying in a house for five years or more means you are more likely to recoup what you paid in transaction costs and generate a return on your investment. According to Data Solutions’ 2017 Rental Affordability Report, buying is more affordable than renting in 66 percent of American housing markets. 

If you are having trouble deciding whether you should rent or buy, checkout the “Rent vs. Buy” calculators at Trulia.com or Bankrate.com to see what you can afford and always consult with your trusted financial adviser for advice.

Dana’s Take: A friend of mine just experienced the good and bad of renting. Single, with grown kids, she was excited to sell the big house and rent a cozy duplex with a charming front porch. After one year, her landlord notified her that he would not be renewing the lease. That is the ugly side of renting – the landlord retains the right to un-house you, no matter how much work you’ve put into the property. 

Soon after, she discovered the good side of renting. She found a new apartment with better security and a new kitchen and bathroom. Flexibility is the upside of renting. 

Home is where the heart is, whether you rent or own.

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Saving Beyond Your 401(k)

Ray’s Take: Buried treasure may sound like something from a fairy tale, but in 2013 a California couple discovered the largest buried treasure in U.S. history. The Saddle Ridge Hoard, as it became known, was made up of 1,411 gold coins minted in the 1800s and worth more than $10 million.

While I have yet to meet anyone who buries their money as a method to save it, most people do use their employer-provided 401(k) as their primary savings vehicle. While a 401(k) is a simple and effective way to save money, it’s always good to consider other savings options to build your wealth in addition to your 401(k).

If you are enrolled in a qualified high-deductible health plan and are eligible for a health savings account (HSA), this can be a great option to help you save. Contributions to these accounts are pretax and withdrawals are tax-free for qualified medical expenses. In addition, unused money can stay in the account until retirement and you can use the money to pay your Medicare premiums.

Roth IRAs (individual retirement accounts) can also be a key player in your overall portfolio. The tax shelter benefits are so extraordinary that Congress specifically limits them to individuals and families with adjusted gross incomes of less than certain predetermined thresholds. Contributions are not tax-deductible, however, if you need to make a withdrawal of your past principal contributions, you can do so tax-free without an early withdrawal penalty, though you won’t be able to replace the funds again once they’ve left the account.

A traditional IRA is another option to consider. You can make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement.

Finally, a nonqualified investment account can be layered onto the above tax-favored accounts. With wise planning, these retirement savings options can help you save without burying your riches in your backyard.

Dana’s Take: As adults, we marry, get a good job, buy a house, start a family and assume our happily ever after will continue forever. In 2017, the probability of a marriage lasting 20 years was 52 percent for women and 56 percent for men.

Three of my close friends are going through major reversals of fortune in their mid-50s. Each of them had six-figure household incomes and large homes. Now, because of divorce, they are renting much smaller spaces and splitting their retirement fund in half.

Putting your money into a retirement fund is never fun, but it’s a good idea. Since we can’t see what is around the corner, it’s a good idea to seek the counsel of a financial adviser who plans for all outcomes.

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The Business of Airbnb

Ray’s Take: The story of one of the world’s hottest tech companies starts with two roommates, Brian Chesky and Joe Gebbia, offering air mattresses and homemade breakfast in their apartment to out-of-town guests who couldn’t afford a hotel room in San Francisco. What started as a way to make a few bucks to pay their rent is now the company Airbnb.

Airbnb is a privately owned accommodation rental website that enables hosts to rent out their properties or rooms to guests who use the website to find somewhere to stay. Airbnb now offers over 3 million listings in 65,000 cities and 191 countries.

There are several different reasons people are entering into the Airbnb business. Some want to make a few extra bucks off their available space, others want a stable secondary source of income and then there are those who want to build a serious Airbnb business that will become their main source of income.

Here are some things to consider before listing your property and entering into the Airbnb business. Get a market report for your property. Some markets are not big enough to support this type of business and you may not make money if there is not a demand in your area.

Get the proper insurance coverage. Airbnb’s Host Protection Insurance will act as primary insurance and provides liability coverage to hosts. If you have questions about how this policy interacts with your homeowner’s or renter’s insurance, you should discuss your coverage with your insurance provider. Some policies protect homeowners and renters from certain lawsuits that result from injury to a visitor, while others do not.

Protect your identity. Do your due diligence and screen all potential guests. Lock up or store all passports, bank statements, social security cards and anything that shows your full name and address. You may consider holding or forwarding your mail when you have guests.

Don’t forget about taxes. You might be subject to rental income taxes. To assist with U.S. tax compliance, Airbnb collects taxpayer information from hosts so they can provide an account of their earnings each year via 1099 and 1042.

Dana’s Take: Airbnb lists 300 rentals in Memphis and HomeAway lists 219. According to their maps, one or two of the listings are within walking distance of our house.

As we approach our empty nest years, I daydream about renting out our house on Airbnb. Ray would rather sell the house than rent it to strangers. I suppose Ray is right. Last summer, a Cooper-Young couple rented out their home through Airbnb, and police discovered the renter using it for an illicit enterprise. The neighbors weren’t too happy.

Short-term rentals sound like a dream but could turn into a nightmare.

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