Couple golfing
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Michael and Donna Masino always dreamed of owning a vacation home — a retreat from the hustle and bustle of city life. Their other requirement: it needed to be somewhere warm so they could be snowbirds for part of the year.

The Monroe, New York, couple’s two-year property search eventually led them to Palm Beach Gardens, Florida, and to PGA National, a famed housing community with multiple golf courses.

After working with a real estate agent to extrapolate rental income projections and housing costs, the Masinos settled on a $230,000 townhome in May. The couple put in an additional $25,000 for upgrades, and their investment is paying off with renters covering all of the home’s costs for most of the year, Michael Masino says.

“You have to set a vision for what you want, and living day to day doesn’t work,” says Masino of preparing your finances to become a snowbird. “You can’t be afraid to take risks. Otherwise, there’s no reward.”

The decision to buy a second home involves careful planning and budgeting, particularly if you plan to split your time between two locales. The earlier you start planning for your future as a snowbird, the better you’ll be positioned to make it happen when the time is right.

Second home or investment property? How to finance a snowbird home

When you buy a second home, you have these options: you can pay for it in cash or finance it as a second home or as an investment property.

Lenders have different guidelines for buying a property as a second or vacation home versus an investment property that you plan to rent out most of the year, says Peter Eckerline, managing director and wealth management advisor with Merrill Lynch in Wayzata, Minnesota.

For starters, it’s typically harder to qualify for a conventional loan for a second home. These loans typically come with higher down payment, credit score and asset requirements to prove you can handle the additional mortgage payments and household expenses, in addition to other debts.

Some homeowners with considerable equity use their primary home’s value to pull out cash for a second-home purchase using a home equity loan, a home equity line of credit (HELOC). or a cash-out refinance.

“You should start saving and thinking about this in your 40s if you want to become a snowbird in your 50s or 60s,” he says.

Many snowbirds who buy a second home as investment property rent it out to pay for expenses. Working with an experienced real estate agent who can run an analysis of projected expenses and costs, as well as projected rental income, to see the risks and benefits of their investment, says Sarah A. Greenberg, a real estate agent with Keller William Realty Jupiter in Jupiter, Florida.

“[Snowbirds] have to find something they absolutely love that they will enjoy and meets their needs,” Greenberg says. “If their goal is to have [the property] pay for itself, they need to consult with a financial planner.”

Avoid getting snowballed by taxes

Purchasing a vacation home versus an investment property has many tax implications, Eckerline points out.

With the new tax law, you can deduct the interest on the first $750,000 of debt secured by a first or second home to buy it or make substantial improvements. However, this deduction doesn’t apply to investment properties. Another consideration: the total of all state and local tax deductions — property taxes included — is now limited to $10,000 per tax return if you itemize.

If you rent your home out for 14 days or less in a year, you don’t have to report that income and it’s considered a personal residence. If you do rent a second home out more than 14 days, the IRS requires you to report all rental income; certain rental expenses are deductible on your return.

Another tax consideration: state residency. If you’re a snowbird from a high-tax state like New York, California or New Jersey, it may work out better (financially) to establish residency in Florida or Texas where there are no state income taxes. Different states have varying tax laws, but, generally, if you spend more than 183 days in a state, you’re considered a resident. Your snowbound state may have additional residency requirements to clear.

A tax professional can help you run the numbers to decide if buying a second home and establishing residency in a low- or no-tax state is a savvy financial move.

Before buying, give snowbird lifestyle a ‘test drive’

One of the worst mistakes new snowbirds make is buying before they’re ready. That can lead to buyer’s remorse and be an expensive mistake, Greenberg says.

“If you sell a second home in the first two years [after buying it], you’ll pay capital gains taxes and may not break even on closing costs,” Greenberg points out.

Eckerline also advises his clients to be cautious. If you buy before trying the snowbird lifestyle out, you might realize you’re missing family back home or that the stress of back-and-forth travel and maintaining two homes is more than you can handle — financially and physically, he says.

“It’s a huge investment so make sure it’s something you like,” Eckerline says. “Take a hard look at the financials; you don’t want to stretch yourself to the limit. Make sure you have plenty of cushion so you’re not stressed.”

Other snowbird costs to consider

Before you fall in love with the idea of living part of the year elsewhere, look at the entire financial picture and how it will impact your lifestyle and budget.

Snowbirds have numerous expenses besides mortgage payments, property taxes and homeowners insurance. Here are some common costs to consider:

  • Travel — Flights to and from your second home can add up, particularly if you travel during the holidays. Add this into your budget when deciding where to buy and how often you’ll go there.
  • Flood insurance — You might be required to purchase flood insurance for your second home if it’s in a federally designated flood zone. Even if it’s not required, it’s smart to purchase flood coverage for added protection.
  • Homeowners association dues — Your second home or investment property might belong to a homeowners association, or HOA. Before you buy, ask what those fees are and what services/amenities are included.
  • Second vehicle and auto insurance — Getting around town in your second-home location might require a second vehicle. If you buy a second car, factor in auto payments and auto insurance, as well as maintenance expenses.
  • Primary vehicle shipping/driving — If you plan to use a vehicle you already own to get around, you’ll have to drive it to your second home or pay for shipping. Plus, there’s gas to consider.
  • Furniture and appliances — Your second home will need furniture, appliances and basic necessities, such as bed linens, towels, kitchen utensils — you get the idea.
  • Medical expenses — Your health insurance coverage may not extend to your second home and a provider could be considered “out of network” with your current plan. Consider how that might impact your budget if you need medical care.
  • House sitting/maintenance expenses — Your primary home might need routine maintenance or house sitting (watering plants, tending to the mail and cleaning, for example) while you’re away. The same goes for your snowbird home when you leave.
  • Property management — If you don’t want to manage rentals yourself, a property manager can come in handy. You might pay a flat monthly fee or a percentage of your monthly rental income to a property manager, as well as additional fees for advertising, contributing to a repair fund and other miscellaneous costs.

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