National surveys highlighting the best places to live continue to include several college towns, often touting their slower pace and the athletic facilities and educational programs offered by the school. College towns also remind people in a variety of age groups of the places where they grew up (or received their education) and where they ultimately would like to return.


For example, two couples my wife and I have known for years recently purchased homes near Western Washington University in Bellingham, Wash. When I asked if the homes were going to be college rental investments, I was told that both couples plan to make the homes their second residences.


One couple who wanted to be closer to two grown daughters had signed up to do volunteer work in the Bellingham area. The other couple planned to use the home as a jumping off point for boating in the San Juan Islands and Queen Charlotte Strait.


If you want to move down the road, especially to a college town, see what’s possible today. Some owners need to sell and could be open to different types of financing.


In addition, there are plenty of potential renters (other than “Animal House” undergraduates) associated with a college or university who would be happy to rent a comfortable place close to campus. The number of visiting professors to college campuses always is underestimated, as are the number of staffers (secretaries, security personnel, catering staff, librarians, etc.) who often are terrific rental-lease prospects.


Notes sent to human resource representatives have worked wonders in landing mature renters, as have inquiries posted in faculty lounges and on-campus faculty living areas. Graduate students (some married) also form a significant renter pool. Sometimes, professors seek alternative housing for highly coveted students.


A purchase at today’s prices could save you money, return you to your roots and perhaps achieve your goal of returning to campus for more than a football weekend. It also could provide you with a huge pool of renters until you get there.

How does buying a second home compare to investing in common stocks?


Conventional wisdom still holds that, over time, common stocks offer the best returns. This may be true if measuring cash-on-cash return, but when looking at total return, the picture changes.


The ownership of real estate offers four distinct advantages over stocks, according to John Tuccillo, former chief economist for the National Association of Realtors.


* Real estate prices are less volatile in most areas. Stocks can move a great deal in both directions. This can make ownership of stock a high-risk proposition, with profit often dependent on timing.

Stocks can bounce up and down. Someone who cashed out one year might have seen a huge return; someone else who waited another year could lose a great deal. House prices fluctuate as well, but to a lesser range. If real estate prices don’t shoot up the way stock prices do in a bull market, real estate markets don’t crash the way stocks do when the bull runs out of steam. In short, it’s a less risky investment most of the time.


* Real estate is a leveraged investment. One can own a home with a down payment of 20 percent. Most investors can’t do this with stock. They need to pay the entire price of the stock. Because of this difference, when the price of a stock rises 5 percent, the investor makes 5 percent on his or her money. If real estate purchased with a 20 percent down payment rises by 5 percent in value, the return is upward of 25 percent.


* Real estate is tax-advantaged. Any interest incurred for the financing of a second home is deductible from ordinary income for tax purposes. If a second home becomes an investment property, tax can be deferred and sometimes eliminated. The stock investor, on the other hand, pays capital gains tax and can’t deduct the interest on any debt incurred for the purchase of financial assets.


* An investor can live in real estate. The investor can’t go to sleep in a stock certificate, or use it to fish with their children. Investors can only look at certificates and hope they make money. Real estate provides many kinds of satisfaction that money can’t provide.


A second home has long-term wealth-building powers. In a nutshell, if the owner thinks a house is good enough to live in and enjoy, someone else will too, and they’ll pay for the privilege to rent it.


The ownership of an investment home, particularly a property the homeowner can personally enjoy, pays dividends on a variety of levels and can be a very profitable road.

“I know the real way to retire in Mexico,” said Jeffrey Hill, a part-time Fort Lauderdale resident who uses to promote his rentals. “Start before you are ready.”


Hill, a former Seattle resident, has four vacation rental homes in Puerto Vallarta and one in Florida. (“Does that tell you which is more profitable?”) He spends most of his time south of the border and part of his year in Fort Lauderdale. 


“Take your investment money and buy a second home today where you want to retire or think you want to retire. Create a good rental property, and rent it for the next five, 10 or 15 years. The sooner you start, the better. I would not be where I am today had I not bought my first home in Mexico 11 years ago. In fact, I wish I had bought 30 years ago.”


Hill and others bristle at the thought of Mexico being stigmatized by media coverage of violence.


“There have been no incidences of drug violence in our little beach community of 15,000,” said Glen Triplett of his 5,000-square foot villa at Rincon de Guayabitos, 45 miles north of Puerto Vallarta. “The local people are very friendly and it is a great place to live.”


In reality, most of Mexico is unchanged and laid-back, warm and welcoming to foreigners. Owners like Hill say the country has received a bum rap, as reporters have raced to make the world believe that the entire country is dangerous. Many of the areas continue to appreciate, unlike most of the markets in the U.S.


Hill has been going to Puerto Vallarta for more than 30 years and has owned property there for more than 11. He estimates 10 percent of his rental clients ask about the drug violence. A far greater percentage asked him how to get started with a retirement home in Mexico.


“Buy now,” Hill said. “So many people leave their money sitting in some investment until the day they finally make the move to retire. They sell their home when they finally retire and start looking for their new place to go. Well, it's very possible that as the years go by, the prices will continue to go up.”

When analysts look at stocks, they often focus on the price-earnings ratio as a measure of whether the stock is overvalued or undervalued. The higher the number (especially relative to either the market as a whole or to historical averages), the more risk of a decline in price over time.


UCLA Professor Edward Leamer proposed that real estate be considered in a similar light. In this case, though, the ratio is the price of the second home or investment property to the annual rental it will earn. This calculation will give you a standard by which you can judge the relative potential for appreciation of different properties in different neighborhoods and even in different cities. In other words, it can help you make sound investment decisions by giving you a tool to measure alternative investments against each other. Here’s how it works:


Suppose you’re looking at a $255,000 property that you will rent for $1,500 per month, or $18,000 per year. (We’ll assume it will always be rented out, but you can figure in whatever you deem to be reasonable.) You also are looking at a $120,000 property that will rent for $850 per month, or $10,200 per year. The price-earnings ratio for the first property is approximately 14 (255 divided by 18), and the second is approximately 12 (120 divided by 10.2). The second property appears to be a better candidate for appreciation since it has the lower price-earnings ratio.


For a truly effective comparison of the two properties, you need to make a second calculation. You need to look at the price-earnings ratio average for both properties relative to those properties in the same neighborhood. If the ratio for the neighborhood of the first house is 20 while the ratio for the second house is 10, then the first property might be the better buy. It is underpriced relative to its surroundings, while the second property is overpriced.


Although all this might appear to be complex, it’s really quite simple. After all, you already know the prices being asked for the properties you are evaluating, and you should know what rent you can charge once you own them.


All that’s needed is to find out the averages for prices and rents in the immediate neighborhood, and you’re done. Check, county records, a local Realtor or a property manager to help you out with these two numbers. This is a helpful research process that could propel you to financial success.

We used to own a very large home in an old, in-city neighborhood that most of our friends thought looked great at Christmas.


I had never really thought about it very much until a successful bid at the local babysitting co-op auction brought us a one-hour visit from Santa.


As the neighborhood kids were coaxed into family-portrait poses with their parents and Santa near the Christmas tree, I sat back and thought how appealing the house actually was.


If there's one time of year the house feels presentable, it's during the holidays. And it's not just the yuletide decorations. The kids seem to help more, perhaps knowing the consequences of being naughty rather than nice; bulky furniture and toys often are stowed in an attempt to save space, and pleasant baking smells come consistently from the kitchen.


The big day with Santa and the neighbors turned in to an offer to rent. Some of our friends knew we were headed to grandma’s for the holidays and asked if their relatives could rent our home while we were away. It worked out well – and we would do it again.


The idea that nobody rents in-city homes during the holidays has fallen under the conventional wisdom bracket. However, common sense can also be a moving target: Families travel at Christmas and would prefer a home to a hotel room – in our case, two or three rooms.


Everyone wants to feel warm and welcome – no matter who they are. If your home looks great at Christmas, offer to rent it out. The online reviews will be all the marketing you need, and you can stow any can’t-break ornaments before you go.


Tom Kelly’s book “Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International and Jeff Hornberger, the National Association of Realtors’ international market development manager.

An Individual Retirement Account (IRA) can help you achieve your goal of a second home that you hold for investment. Self-directed real estate IRAs are not only relatively easy by they are also not subject to some of the guidelines that apply to employee-sponsored qualified plans, like a 401K enforced by the Department of Labor.


To prepare for your real estate IRA, designate how much of your retirement funds you wish to use in the property deal and open a new IRA account with an independent administrator.


The guidelines covering real estate IRAs are stringent. If you break one of the following rules, you could jeopardize your tax-free status on your account.


  • The land or house must be treated like any other investment.
  • All rental profits must be returned to the trustee.
  • You cannot manage the property. But your trustee can hire a third party – a real estate broker, or local property manager – to collect rent payments and maintain or improve the property.
  • The house or property (or proceeds from its sale) must remain in the trust until distribution at retirement. If the trustee is instructed to sell the property, funds can be transferred to another account for reinvestment.


You cannot use IRA funds to buy your own residence or any other property in which you live. It must be investment property. But when you retire, you can direct your IRA to turn it over to you as a distribution at the current market value.


If you purchase the property with Roth IRA funds or convert your conventional IRAs to Roth IRAs for the purchase, the property appreciation would be tax-free.


Take the time to consider a second-home IRA – especially if you know the property will appreciate in value.

Here are three national firms handling real estate IRAs: Entrust Administration; Guidant Financial; Pensco Trust.

Approximately 70 percent of America’s elderly own their own homes and 80 percent owe nothing, according to HUD statistics.


If you are property rich and cash poor, a reverse mortgage could put you in that vacation condo sooner than you think.


Reverse mortgages are aimed at individuals 62 years or older who own their homes – either debt-free or close to it – and who have a need for additional cash. The homeowner cannot be displaced and forced to sell the home to pay off the reverse mortgage, even if the principal balance grows to exceed the value of the property.


The lender never takes title to your property. If the value of your house exceeds what is owed at the time of your death, the rest goes to your estate.


HUD’s Home Equity Conversion Mortgage (HECM) is the most popular reverse option available today. All HECM loans have been guaranteed by the Federal Housing Administration.


The reverse mortgage can be used to acquire a second home. For example:


  • Bob Crawford, 72, and his wife, Jane, 71, have a $235,000 home in St. Louis.
  • They take out a lump-sum reverse mortgage on their primary residence totaling $106,000.
  • They buy a vacation condo for $125,000 in New Mexico with the money ($106,000 plus $19,000 from Bob’s retirement).


After a decade of no loan payments, they choose to downsize. They sell their primary residence, pay off the underlying debt and move to the New Mexico condo. Using an average appreciation rate of 4 percent on the primary residence and a 7 percent interest rate on the loan, the balance on the loan would have increased to $253,198 and the value of the home increased to $347,857. If the home netted that amount upon sale, Jane and Bob Crawford would put $95,659 in their pocket.


Remember they have made no mortgage payments – on either home – for the past 10 years.


For a reverse mortgage lender in your area contact the National Reverse Mortgage Lenders Association

Auditioning for Retirement  

Posted by tkelly Nov 24, 2010

If you want to change your lifestyle when you retire, it’s time to start the audition.


Now is a terrific time to research and purchase a second home that you can use now for family vacations, while testing it out for retirement down the road.


According to the most recent study by the National Association of Realtors, consumers are making “a lifestyle choice” and turning to second homes sooner in their lives. That finding affirms what we know about Baby Boomers – the prime candidates for second-home purchases – who define themselves by personal experiences and adventure. Interestingly, they are now joined by their children – the proud members of the Gen-X and Gen-Y generations – who view practical experiences as paramount in their lives. 


There are two key aspects to a second home – the financial and the emotional.


Simply put, now is the time to buy a vacation home. Prices are down in just about every location, and mortgage interest rates are hovering at some of their lowest levels in history. Money can go 35 percent further now than a few short years ago.  More importantly, the economic downturn has begun to brighten.  Families are feeling they can afford to go on vacation again – providing you with solid backup if you need to rent out your eventual retirement home to make ends meet.


Second homes also can be filled with memorable experiences, and will mostly likely net you more than a few dollars down the road. They are flexible and interchangeable in their functions: recreation, investment and retirement. They can provide the moment of a lifetime, be paid for by other people and, when properly positioned, be traded tax-free.


If you have made up your mind to spend more quality time with your family, add to your investment portfolio or do a better job of planning for retirement, you accomplish all three by making a down payment on a second home. There’s never been a better time in the past seven years to “buy low” with the prospect of eventually “selling high."


Attempting to predict the bottom of a targeted housing market is like trying to pick the absolute low point of a stock or bond - you won't know until it begins to rise. Think of the memories you'll lose in the interim.


For those cash-strapped second home buyers who do not want to be forced into a tight time frame, renting or leasing with an option to buy can bridge the gap to purchase. If you really want the place, give it a shot. You’ll never know if you don’t ask.


Sometimes, a rental or leased home can turn into the permanent home for the renters, which is why a lease with option to buy is sometimes preferable. And, a lease option can buy time to research the area while getting a portion of the monthly rent credited toward the down payment.


Many owners make a commitment to purchase another house before selling their old one. If the first house does not sell, they are faced with making payments on both houses. To avoid this debt load, the owner agrees to lease out the first house for 12 or 18 months.


The lease agreement includes an option allowing the tenant to buy the property within the lease period. Here's how a typical lease-option works:


  • The owner and tenant agree on a purchase price.

  • The owner charges the tenant a nonrefundable fee for the option.

  • The monthly rent is typically greater than market rates because no down payment has been made, but a portion of it applies toward the down payment.



Owners should read their mortgage agreements carefully before considering a lease-option. Some lenders may activate a due-on-sale clause if the borrower enters into a lease option with another party.


Lease-option forms are available at some stationery stores that carry professional forms. If you are concerned about the language of the agreement, consult an attorney or escrow officer.

No Mortgage, No Problem

Posted by tkelly Nov 24, 2010

Can’t qualify for a conventional mortgage? Flat checkbook? Your options are still wide open. Here are a few proven routes that can deliver you to the doorstep of a recreation, investment or retirement home that you can us for all three purposes over time:


Seller financing


Home sellers know that conventional money is tight and that many solid loan applicants are finding it difficult to qualify for lender financing. These sellers are willing to consider "carrying the paper" for a few years until other mortgage funds become available. The benefit to buyers is that they save considerable loan fees while the seller broadens the net of potential purchasers by offering an attractive financing option.


In some cases, a rustic cabin does not qualify for bank financing due inadequate water supply, septic or electrical service. The seller must agree to “play the bank” and work out private financing with the buyer. The parties are free to negotiate terms, including down payment amount and the interest rate on the loan.


Pick a partner


Individuals, couples or families can combine their assets and purchase the property as partners. It often makes sense, especially for couples that enjoy being together yet know they will never be able to afford a getaway of their own.


Here’s a pick-a-partner example. Let’s say the Jacksons (no savings, good income) and the Roberts (some savings, low income) are golfing buddies. A deal is made where the Roberts would make the down payment and the Jacksons would make the monthly payments plus pay for all greens fees for three years. When they can’t use it, they rent it out. After three years, they refinance or sell the home and the Jacksons get their down payment back with a minimal interest allowance. The two couples split any appreciation upon sale.


Time to revisit VA


There’s another possible avenue available for a second-home purchase, one that is often overlooked by veterans of military service. While federal regulations require that all loans insured by the Department of Veterans’ Affairs be used only to acquire a “primary residence,” it is possible to purchase a second home using your VA loan guaranty. As in many cases involving the use of real estate, the definition of primary residence is the place you live “most of the year.’’ So, if you use the home more than six months of the year, it can be defined as your primary residence.