MONEY home prices

Buying or Selling a Home in 2015? Here’s What You Need to Know

After a boom, a bust, and a bounce, housing finally gets back to "normal."

Housing should be a drama-free zone in 2015. “After the boom, the bust, and the recovery bounce, we are transitioning to a calmer market driven by fundamentals,” says Jed Kolko, chief economist at Trulia.

Even though the econ­omy is growing and mortgage rates will remain low—the 30-year fixed isn’t likely to pass 5%—bubbly gains in housing are unlikely. Household income has barely budged since the housing market bottomed in late 2011, while home prices are already about 20% higher on average. Plus, with cautious lenders requiring hefty down payments and low debt/income ratios, it’s not as if buyers have the capacity to push prices sharply up.

All that figured in, CoreLogic forecasts a 4.4% rise in the national median home price. “That’s healthy and sustainable,” says chief economist Mark Fleming.

Here’s what to do if you’re thinking about buying or selling in 2015.

Sellers, forget bidding wars. In most markets you still have leverage, but less than you did. In the summer of 2013 about 20% of homes were selling at a premium to original list; this fall, 11% are, the National Association of Realtors reported. The takeaway: “You have to price your house right,” says Redfin chief economist Nela Richardson. ­Review recent comps and list within 5% to allow for counteroffers.

Buyers, save interest. While the 30-year fixed is not expected to hit 5% until later in the year, a winter move will likely nab the lowest rates. Meanwhile, the 15-year mortgage, now at 3.3%, should stay under 4% for most of 2015—and can be a good call if you’re looking to pay off the house before retirement.

Owners, renovate. Especially if you have a low-rate mortgage, “it can be a lot cheaper to remodel to age in place than move,” says Kermit Baker, director of the Remodeling Futures Program at Harvard’s Joint Center for Housing Studies. Rates on home-equity loans and lines of credit are still “in shouting distance of record lows,” says Keith Gum­binger of mortgage data service HSH.com. While loans are pricier than HELOCs—possibly 6.5% vs. 5.5% by year’s end—the fixed-rate HEL can be a safer bet in a rising rate climate.

Read More on Home Buying and Selling in Money 101:

How Much House Can I Afford?
What Renovations Will Pay Off When I Sell?
How Do I Get the Best Rate on a Mortgage?

Read next: The World’s 10 Most Expensive Houses—and Who Owns Them

MONEY home loans

Why You Might Have a Better Shot at Buying a Home Than You Realize

House keys on top of mortgage loan agreement
moodboard—Getty Images

If your financial situation isn't perfect, here's how to work within the four pillars of mortgage lending to get approved for a home loan.

Did you have a bad credit event in recent years? Do you have less than two years in the same career field? Is your monthly income less than three times your proposed payment? Fear not, when your financial picture doesn’t fit neatly into the box, you may still qualify with some lenders. Here’s how.

When you apply for a mortgage, lenders use four pillars to measure your finances and put together a loan suited to your purpose. Your credit, debt, income and assets play integral equal roles in lenders’ eyes. Let’s break down the nuts and bolts of what lenders want to see on loan applications, and how working within these four pillars may help you find a mortgage to suit you, even if your situation isn’t “perfect.”

Credit

The credit score is the best-known financial barometer to predict a borrower’s future likelihood of default. Of course, you’re not planning to get a mortgage to subsequently go delinquent, but lenders nevertheless use it to measure your payment predictability. Lenders want a credit score of at least 620 or better. Beyond the credit score is the credit report, which reveals details about your past and current financial habits. Mortgage companies consider delinquent payment patterns a red flag — including old collections of all kinds, past-due balances even on accounts that are no longer active. Expect an inquisition on such accounts.

So what if you have a previous bankruptcy, foreclosure, short sale or loan modification? What if more than one of these events exist in your credit history? Again, fear not, but do be prepared to answer all questions regarding such events. If you have supporting documentation, provide it to your mortgage broker upfront. Generally, even today you can still get a mortgage just a few years out of one or more of these credit events. Most commonly, there’s a three-year wait time for government financing (i.e., FHA) and seven years on conventional financing (with the exception of a short sale — the waiting time is now four years). The most recent date is considered if one or more such credit events exist in your credit history.

Active trade lines (meaning open credit) are another lending hot button. You’ll need to have at least two forms of open and available credit that you use regularly – that doesn’t necessarily mean carrying a balance, but it does mean you need to show credit activity. Unfortunately, gone are the days of using alternative forms of credit, like a cell phone bill or a cable bill, in lieu of credit report trade line.

Checking your credit in advance of applying for a mortgage can give you time to work through any issues, or to take time to work on your credit score if it needs to be higher. You can check your credit reports for free once a year from each of the three credit reporting agencies, and you can see two of your credit scores for free on Credit.com.

Debt

A lender wants to see every single minimum payment obligation you have – whether or not it’s on your credit report — independent of your general household expenses.

The typical forms of debt a lender must account for when determining how much mortgage you can afford are: any form of car payment, minimum payments on credit cards, student loans, personal loans installment loans, alimony or child support, garnishments and IRS debt.

This seems simple enough, but sometimes the way a debt is listed on your credit report can cause a problem. Let’s take a common example: Student loans. You may have multiple student loans through one creditor, and they are all listed out on your credit report that way, but you make one monthly payment to that creditor for the multiple loans. The fix: You’ll need to provide your mortgage broker a payment letter from the creditor identifying what loans are included with the student loan creditor and the amount of your monthly payment.

Another common issue is co-signed loans – specifically, loans someone else took out that you co-signed. In order for the other party’s debt to not hurt your mortgage application, you’ll need to provide documentation that the other person is making the payment directly to the creditor and has been since either the inception of the loan or the most recent 12 months. This is usually accomplished with bank statements or canceled checks. Reducing your debt load is immensely beneficial when trying to qualify for a loan.

Income

Lenders must be able to show that your income supports your proposed mortgage payment plus your other debt payments. If your debt, including the proposed mortgage payment, exceeds 45% of your income, you may need to look for less house, borrow less money, or pay off some of your debts to improve your numbers. (You can use this calculator to give you an idea of how much house you can afford.)

When it comes your income history, lenders like to see a minimum two-year period of working in the same or a similar field. Don’t have it? That’s OK. Make sure you explain this to the lender in writing, and be sure include any occupational gaps. If you’re an hourly wage earner, expect your banker to average your year-to-date income. If you’re salaried, it will be much more transparent in terms of qualifying because typically a salary is a more stable form of income.

Assets

The down payment amount you have can dictate the loan program and ultimately how much mortgage you can handle. Assets include both funds for a down payment as well as savings in the bank post-closing of escrow. Mortgage brokers, banks and lenders expect to see two to six months of savings post-closing, and at least 3.5% of the purchase price for down payment. If you have access to funds that aren’t yours, gift money, for example, is a viable alternative, just be sure provide the full paper trail in any exchanging of funds.

*Mortgage tip: When buying a single family home, your full down payment funds can be gifted.

If you’ve been told that you can’t get approved for a mortgage, get a second opinion — perhaps even a third or fourth. Make sure to disclose all the pertinent known facts about your financial situation. A quality professional will ask you to provide details on the who, how, what, when, where and why — which can help make your quirky financial picture much more cohesive and thus more likely to get you approved for a mortgage.

More from Credit.com

This article originally appeared on Credit.com.

MONEY mortgages

Here Come Cheap Mortgages for Millennials. Should We Worry?

young couple admiring their new home
Justin Horrocks—Getty Images

The federal agencies that guarantee most mortgages are launching new loan programs that require only 3% down payments for first-time buyers. Is this the start of financial crisis redux?  

According to new research from Trulia, in metro areas teeming with millennials, such as Austin, Honolulu, New York, and San Diego, more than two-thirds of the homes for sale are out of reach for the typical millennial household.

That goes a long way to explaining why first-time homebuyers have recently accounted for about one-third of homes sales, according to the National Association of Realtors, down from a historic norm of about 40%. And it should concern you even if you’re not a millennial or related to one: A shortage of first-time buyers makes it harder for households that want to trade up to find potential buyers; and spending by homeowners for homes and housing-related services accounts for about 15% of GDP.

Now the federal government appears intent on reversing the trend — or at least on easing the pain of the still-sluggish housing industry.

Trulia’s dire analysis assumes that buyers need to make a 20% down payment — a high hurdle for anyone, let along a younger adult. But Fannie Mae and Freddie Mac, the government agencies that guarantee the vast majority of mortgages, this week launched new loan options that will require down payments of as little as 3% for first-time buyers (and, in limited instances, refinancers as well). Fannie’s program will be live next week; Freddie’s, which will be available to repeat buyers as well, will launch in early spring.

Before you get all “Isn’t that the sort of lax standard that fueled the financial crisis!?”, it’s important to realize significant differences between now and then.

The only deals that will qualify for the 3%-down programs are plain-vanilla 30-year fixed-rate loans. No adjustable-rate deals, no teaser-rate come-ons, and, lordy, no interest-only payment options. And flippers are not welcome; the home must be the borrower’s principal residence.

Both Fannie Mae’s MyCommunityMortgage and Freddie Mac’s Home Possible Mortgage program are aimed at moderate-income households. For example, to qualify for Fannie Mae’s program, household income must typically be below the area median. Income limits are relaxed a bit in some high cost areas, such as the State of California (up to 140% of the local median) and pricey counties in New York (165% of the median).

That said, lenders will be allowed to extend these loans to borrowers with credit scores as low as 620. That’s even lower than the average 661 FICO credit score for Federal Housing Administration-insured loan applications that were turned down in October, according to mortgage data firm Ellie Mae. (The average FICO credit score for FHA approved loans was 683.)

Like FHA-insured loans, the new 3% mortgages offered by Fannie and Freddie will require home buyers have private mortgage insurance (PMI). That can add significantly to mortgage costs.

For example, a $300,000 home purchased with a 3.5% fixed rate loan and a 3% down payment would have monthly principal and interest charges of about $1,300 a month. The PMI adds another $240 or so to the monthly cost; that’s nearly 20% of the base monthly mortgage amount. (You can estimate the bite of PMI using Zillow’s Mortgage Calculator.)

But one significant advantage the new Fannie/Freddie loan programs have over the FHA program is that they will allow homeowners to cancel their PMI once their home equity reaches at least 20%. Beginning in 2013, the annual insurance charge on FHA-insured loans, currently 1.35% of the loan balance, can never be cancelled regardless of whether the borrower has more than 20% equity.

 

MONEY home prices

Brooklyn Is Now the Least Affordable Housing Market in the Country

Brooklyn brownstones
Jay Lazarin—Getty Images

Big surprise.

GENTRIFICATION, noun.

The process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents

- Merriam-Webster

Poor hipsters. In the process of turning Brooklyn into a hive of artisanal mustache boutiques and fixie-bike shops, they may have priced themselves out of the neighborhood. According to a recent study by RealtyTrac, which analyzed the affordability of 475 counties through October 2014, Kings County—also known as Brooklyn—was the least affordable in the nation.

The study gauges affordability by measuring the percentage of the locality’s median monthly household income that is required to make monthly payments on a median-priced home in the area.

When RealtyTrac ran the nation-wide numbers in October, payments on a median-priced home required 26% of the average household income. In Brooklyn, by contrast, where the median home costs $615,000 and the median household brings in only $46,960, home payments take up about 98% of a regular family’s wages. That’s less affordable than Manhattan — and even than San Francisco, where half of all homes sell for $1 million or more.

In fact, the typical homebuyer has been priced out of the borough’s real estate for longer than you might have thought. RealtyTrac’s report also measures affordability between January 2000 and October 2014. Over that 14-year period, home payments on a median-priced house still would have cost the typical family 95% of their income. Earlier this year, RealtyTrac found Brooklyn was also one of the most expensive places for young people looking to rent.

Why has BKLN gotten so expensive? The answer is probably a mixture of stagnant wages, investor interest, and an influx of more affluent residents. “Incomes have not grown nearly as fast as home prices” in the regions where affordability declined, said Daren Blomquist, vice president at RealtyTrac, in an interview with Bloomberg. “That disconnected home-price growth has been driven by investors and other cash buyers who aren’t as constrained by income.”

MONEY buying a home

How to Beat Newly Hot Real Estate Markets

Buying in a hot market can be tough. These tips can help beat the competition.

How much house will $2 million get you in the United States these days?

You could buy 25 pretty nice four-bedroom, two-bath homes in Cleveland, Ohio. Or, you could get just one modest ranch house in Los Altos, California, the most expensive real estate market in the country, according to a new survey by Coldwell Banker.

But, then again, you would probably get beat out by an all-cash buyer offering a higher bid.

Competition is fierce in today’s emerging hot real estate markets because the inventory of available properties is still extremely low. In areas like Silicon Valley, though, the economy is humming and buyers have plenty of money.

Los Altos is in the middle of the action, surrounded by the corporate headquarters for Google, Facebook and dozens of other major tech companies, as are other California cities: Newport Beach, Saratoga, Redwood City and Los Gatos, the rest of the top five on Coldwell’s list.

As other markets heat up around the country, buyers can learn a few things from what’s happening in some of the hottest places.

NEW MATH

If there is one thing Silicon Valley’s techies know, it’s algorithms. You’re going to need one in today’s top markets to figure out how far above asking you need to bid.

Sumi Kim Hachmann, a 32-year-old researcher at Quora.com, snagged her three-bedroom, one-bath house in Menlo Park last year after six months of trying. Each time she found a house she liked, she crunched the square footage and comparable sales to figure out how much to bid, refining her math each time she lost out.

She liked a fixer-upper listed at $1.1 million, and was willing to bid $100,000 over asking. Her agent told her to double that, at least. She did, but the sellers countered. The house sold for $1.4 million to somebody else

“That was definitely discouraging,” Hachman says. “But it was a learning experience.”

Next time, she went in with a strong offer that amounted to $1,000 per square foot, and won. Now, a year later, she’s incredulous that houses in the neighborhood are going for double that.

While price is largely controlled by location and size, you need to add a premium to your offer if you need a mortgage, says Joe Brown, managing broker of a Coldwell branch in Los Altos. Bids being equal, sellers prefer all-cash because there is less risk. Price will still prevail, though, so a higher bid from a qualified buyer with a mortgage should win.

Another caveat: Keep contigencies out of the purchase agreement. Doing this is difficult for mortgage-seekers because banks typically require that the purchase price match the appraised value of the house. With prices going so far above asking, that can get tricky.

“You either ask them to put a lot more down or have them sign something that they will waive the appraisal contingency,” says Ducky Grabill, a founding agent of Sereno Group realty, who is based in Los Gatos.

Grabill also suggests having the lender call the listing agent and let them know they will guarantee the financing.

LOWER EXPECTATIONS

Another strategy is to buy below your price point, says Brown. If you have the resources for a $2 million house but cannot compete with stronger buyers, then aim for $1.5 million and turn it into the house you want.

This is a modification of the old “buy the worst house in the best neighborhood” adage. But you cannot just sit on this kind of property and hope it will appreciate; you’ve got to renovate.

That’s what Amy Bohutinsky, chief marketing officer of real estate site Zillow.com, did with her own purchase of a fixer-upper in the Seattle area two years ago.

“If you buy it with the intent of fixing it up, it can be an easier way” into a house than engaging in a bidding war, Bohutinsky says.

She also recommends expanding the boundaries of your search: considering for-sale-by-owner properties, preview listings like Zillow’s “Make Me Move” section and “coming attractions” on listing sites.

BE READY

It is not enough anymore to show up at an open house pre-qualified for a mortgage and with a letter that sells yourself. You may need to have an engineer or other inspector come along, says Sereno Group’s Grabill.

She had a client recently clinch a $2 million all-cash deal after his first viewing, but only because he was able to do his due diligence on the foundation issues immediately.

This buyer was one of those bidding down on a property. He was really in the market for more like $2.5 million, and will put the remainder of his budget into fixing it up.

“They are throwing so much more money at properties to get it. It’s a little crazy,” Grabill says.

MONEY buying a home

Homebuyers ‘Addicted’ to Online Listings—But Accuracy Is Still an Issue

141117_EM_homebuyers_1
Getty Images

Almost two-thirds of recent home buyers surveyed said they were "addicted" to online listings, but only 22% said they were always accurate.

A new study from Discover Home Loans confirms the extent to which technology has transformed the way people buy and sell houses. But it also shows the limits of using online real estate sites when shopping for a home.

According to the survey, which polled 1,003 recent homebuyers on how technology affected their experience, 83% used listings sites like Zillow and Trulia, more than any other online resource. But the majority of respondents weren’t always satisfied with what they found. Only 22% said online listings were always accurate. The results reinforce previous studies, which found a disparity between the accuracy of listings on third-party websites and those found on local Multiple Listing Services, the primary tool of real estate brokers. Those listings tend to be updated more quickly than consumer-facing sites.

Zillow and Trulia have previously responded to such studies, noting that their sites also offer special tools to educate buyers on neighborhoods and housing conditions, and include listings of for-sale-by-owner, premarket and new-construction homes that don’t show up in MLSs.

Alison Paoli, public relations manager with Zillow, noted that while she hadn’t seen the full research, “what’s more important to understand about a study like this is that there is no gold standard for [accuracy in] real estate listings.” She added that Zillow gives brokers, agents, and MLSs the option of sending their listings directly at no cost. “Accuracy is top priority for us,” Paoli.

Accuracy aside, the survey showed that buyers still love trolling listing websites. The vast majority of respondents said technology made them feel “smarter” and “more confident,” and almost half said it helped them save money. In fact, two thirds said looking at online property listings “reached the point of becoming addictive.”

T.J. Freeborn, senior manager of customer experience at Discover Home Loans, said the results show that buyers still need a combination of online information and local expertise. “I think technology is an incredibly useful tool in this marketplace, but Realtors have a very deep knowledge of neighborhoods and particular homes,” Freeborn said.

Discover’s data shows buyers tended to shun social media when looking for houses—a surprising result in a world where virtually all other activities are in some way connected to Facebook and Twitter. Only 25% of homebuyers collected ideas on social media, and just 29% used social media to consult friends. (Given how hot some real estate markets have become, perhaps their reluctance can be chalked up to justifiable paranoia about oversharing.)

That data could have implications for home sellers. At least for now, a social media presence is far less important than making sure your home is listed online.

Get answers to your home buying questions from MONEY101:
How Do I Shop for a House?
How Do I Choose the Right Real Estate Agent?
How Do I Negotiate the Best Price on a New Home?

 

MONEY Millennials

What Everyone Gets Wrong About Millennials and Home Buying

Millennials on porch in suburbia
Katherine Wolkoff—Trunk Archive

Conventional wisdom says that millennials are a new and different generation. But when it comes to housing, they're likely to be more conservative and traditional than their parents were.

If you’ve come across any stories mentioning millennials and home ownership, you’ve likely heard this refrain: Young people just aren’t very interested in buying a house. Instead, the story goes, they want to rent a cool apartment, live in a city, and walk to coffee shops. Forever.

This narrative was eloquently expressed in a recent New York Times article about a hip, 30-year-old, unmarried couple choosing to rent in a swanky Virginia high-rise. What made these millennials pick a rental apartment over a nest of their very own? The developer of the couple’s new home, Joshua Solomon, had his theories:

“That generation of folks has seen people really get hurt by homeownership,” said Mr. Solomon, president of the company, which is based in Waltham, Mass. “The petal has really fallen off the rose as it pertains to homeownership. People don’t want to be tied down to a mortgage they can’t get out of quickly.”

Sounds like a reasonable conclusion, right? Multi-unit construction is up, after all, and first-time home buyers are in historically short supply.

But if you dig a little deeper, both Solomon’s generalization and the “millennials don’t really want to own homes” trope turn out to be largely untrue. A number of surveys have shown that the vast majority of millennials would love to own a place of their own. Recent research from housing site Zillow, for example, found that adults age 22 to 34 are actually more eager to own a home than older Americans.

According to Zillow’s data, young married couples in which both partners work (represented by the orange line in the left graph below) currently own homes at a rate close to or above historical norms for their demographic. Even single employed millennials (the yellow line in the right graph) are slightly more likely to own a home than their counterparts in the ’70s, ’80s, and ’90s.

Zillow

So if young adults want homes more than previous generations, why is their homeownership rate at a historic low? The answer is that millennials are getting married later in life, and not having two income streams makes it much harder to scratch together a down payment.

From 1960 to 2011, Americans’ median age at the time of their first marriage increased by six years, to around 29 from 23 for men and 26 from 20 for women, according to Census data. Then came the financial crisis, which pushed marriage back even further by making financial stability—a marital prerequisite for many— a rarity among recent college graduates. According to one recent study from the University of Arizona, only about half of adults ages 23 to 26 and at least one year out of college have a full-time job.

As a result, the millennial generation’s overall home purchases are down—but they probably won’t be down forever. Zillow’s analysis shows that if millennials were marrying at the same pace as previous generations, their rate of homeownership would be 33%, four percentage points higher than now and roughly the same as in the 1990s. Once this generation begins to tie the knot, the evidence suggests, it’ll be buying homes at least as frequently as older Americans once did.

Old School Values

In fact, there’s some evidence that home ownership is more important to millennials than it is to Gen Xers or boomers. In a recent survey, forty-six percent of respondents ages 18 to 34 told Zillow they believe “owning a home is necessary to being a respected member of society,” and 65% said “owning a home is necessary to live The Good Life and The American Dream.” Both results were higher (in most cases, significantly higher) than older age groups.

America’s newest generation—post-millennials—are perhaps the most old-fashioned of all. A shocking 97% of teens age 13 to 17 believe they will one day own a home, and 82% say homeownership is the most important part of the American dream. If anything, buying a home seems to be getting more attractive, not less.

So millennials really want a home, but they still want a cool home, right? One that’s urban, and different, and close to a Blue Bottle Coffee? Maybe when they’re still young and single, but a large amount of evidence suggests that even today’s young adults look to the suburbs once children come along. Highly dense “core cities” like San Francisco and New York are attractive to millennials looking for fun and adventure, but they’re also extremely expensive to live in when dependents enter the picture.

Research suggests a negative correlation between big cities and child populations. City Journal found that between 2000 and 2010, the population of children 14 and younger fell by 500,000 in the country’s densest urban areas, including Los Angeles, Chicago, and New York. As children disappeared from cities, the nation’s 51 largest metro areas lost 15% of adults 25 to 34—the same age range when many begin to marry and start families. “While it’s not possible to determine where they went,” the Journal noted, “suburbs saw an average 14 percent gain in that population during the same period.”

Mollie Carmichael, principal at John Burns Real Estate Consulting, is already seeing millennials flee cities to more child-friendly environments. “We do find that the millennials want to be in urban areas, but usually when they’re not married and they’re renting” says Carmichael. “But the trigger is marriage, and then frankly they want more traditional areas and more traditional environments than even their parents. They want suburban; they want single-family detached; they want a yard.”

What about millennials’ much-reported fixation on urban-ness? There’s some truth to it, Carmichael acknowledges, but “urban to them means they want the ability to walk to the park and walk to the Starbucks. It’s more about accessibility, and that could be driving to those great places they want to go.”

In the end, America’s newest adult generation isn’t that different from the previous ones. Millennials may Instagram their new home instead of sending photos through the mail, but not much else has changed.

MONEY buying a home

7 Tips For Buying a Vacation Home

Beach house
Astronaut Images—Getty Images

You may be tempted to finally buy that vacation place now that the housing market has healed. Here's what to consider before you start house hunting.

Many Americans contemplating a vacation home abandoned that dream when the housing market collapsed. But now that home values have climbed month after month, with the median price up about 20% since its bottom nearly three years ago, you may once again be toying with the idea of that lakefront, ski or beach getaway place. About 13% of homes purchased last year were intended as vacation homes, up from 11% in 2012, according to the National Association of Realtors.

Yet you shouldn’t let the fact that the market has stabilized drive your buying decisions. Instead follow these seven steps to take to make sure a vacation home is right for you, and won’t turn out to be an expensive headache.

1. Choose the Location Carefully

This may sound obvious, but before you start shopping you need to be able to specify why exactly you want this second home. The answer should shape where you look. For example, 87% of vacation home purchasers in 2013 planned to use the property primarily to getaway with their families, according to the NAR. Thus the typical home purchased was an average 180 miles from the buyers’ primary residence.

If the main purpose is for you and your loved ones to gather together and enjoy the house as a family, you’ll need it to be in an area that is easily accessible for everyone, and that offers plenty of activities for different age groups. While you may think jumping on a flight to Florida isn’t a big deal, elderly grandparents or parents of small children may disagree.

Buyers who plan to rent the home to others- as 25% of purchasers do- may want to choose a location with numerous seasons of rental demand, so you aren’t limited to income only, say, three months of the year (likely when you want to use the home too). When you’re viewing the home as an investment property you’ll also care more about projected growth rates of the communities you’re considering, as well as the health of the local economy.

Related: 6 Amenities to Ensure Repeat Business in Your Vacation Rental

2. Rent Before You Purchase

Before you lock yourself in, rent a place (more than once is best) in the area you’re considering to be certain you’ll actually enjoy it. Stay for at least two weeks to make sure you don’t grow bored on extended stays.

Try to visit in different seasons to understand weather and crowd patterns. For example, you may realize that you hate needing to book a dinner reservation well in advance during the summer busy season, when you’re there to relax.

Or if you plan to eventually move to the home full-time, as one-third of buyers do, you may decide a house outside of town is actually too lonely and inconvenient. Only 32% of vacation homes purchased last year were in a small town or rural locale.

You’ll also learn what part of town you prefer. For example, in Orlando vacation homes are spread out throughout the city, but you may prefer the shops and restaurants in Kissimmee over Davenport.

3. Buy Under Your Budget

Don’t fall into the trap of purchasing a property that is a stretch to afford. Buying a house with too high of monthly carrying costs causes stress, and most people go on vacation to getaway from troubles. It also means that if you eventually decide you want to hire someone to manage the place, or care for the yard, there won’t be any wiggle room in your budget to afford it.

Keep in mind that you can always upgrade to a bigger house down the road.

4. Be Realistic About How Often You’ll Use It

My wife and I have three kids. When they were young we bought a vacation home near our house. We used it all the time. As the kids got older, though, we visited the house less and less. Weekend sports games, friends sleeping over, and church and school activities left too little time to get there.

Be realistic when you make assumptions about how often you’ll actually be able to use the place. You may be better off working out a rental agreement with an owner in the area to use his or her place two or three times a year- and forget about the place when you’re not there.

5. Understand the Tax Implications

Don’t assume you know what the tax consequences of owning that property will be, based on your experience with your primary residence. Second homes can be more complicated.

If you are going to rent out the property, you will need to pay income taxes on the rental income you receive. Your property taxes may also run higher than what you pay now, either because the tax rate in the vacation area is higher than where you live, or because its a second home and not a primary residence. For example, the taxes on second homes in Florida are usually much higher than for primary residences.

A qualified real estate agent should be able to provide details about taxes in the area, and possibly even tips on ways to save, such as buying just outside the city limits.

6. Make a Conservative Estimate of Rental Income

Most buyers tend to be overly optimistic about how often they’ll rent out the place. Talk to a local vacation rental agency about how many weeks of the year you can realistically expect demand. For example, even in a winter and summer destination such as Lake Tahoe you can’t expect to fill the place every month of the year.

You also need a realistic estimate of how much expenses will eat into that income. Presume repairs will cost about 1.5% of the value of the house. So for a $100,000 place budget for at least $1500 a year in repairs. Each year the tab might be higher or lower than the estimate, but this rule of thumb will give you some flexibility from year to year.

Similarly, find out ahead of time what your home insurance tab will run, since second homes are often in hurricane or flood areas and thus pricey to insure, and also may cost more simply because they are empty more often.

7. Don’t Get Caught Up in the Moment

If a friend, family member or another investor brings you an opportunity to buy a vacation home, or to acquire land with aspirations of building a grand home, don’t let yourself be easily persuaded. The proposal can sound romantic but quickly turn into a horror story. Sometimes people have alternative motives. Other times they haven’t actually done their homework to uncover that the so-called deal isn’t really a good one.

Related: How to Market Your Vacation Rental to Ensure Maximum Bookings

So slow down, take your time — and do your research. Move forward only after you have thoroughly run the numbers yourself. An opportunity that turns sour will eat up your money- as well as your precious vacation days.

 

More from BiggerPockets:

10 Things Only Personal Finance Nerds Would Understand

5 Tenant Characteristics Its Wise to Discriminate Against

5 Ways to Reduce Booking Cancellations On Your Vacation Home

 

Another version of this article originally appeared on BiggerPockets, the real estate investing social network. © 2014 BiggerPockets Inc.

MONEY retirement planning

Millennials Feel Guilty About This Common Financial Decision—But They Shouldn’t

Sad millennials leaning on desks
Paul Burns—Getty Images

Young adults aren't saving as much as they think they should for retirement. But paying off debts is just as important.

Millennials are pretty stressed out about their long-term finances, according to Bank of America’s latest Merrill Edge Report. Some 80% of millennials say they think about their future whenever they pay bills. Almost two-thirds contemplate their financial security while making daily purchases. And almost a third report that they often ponder their long-term finances even while showering.

What’s eating millennials? Student loan debt. Even the very affluent millennials surveyed by Bank of America feel held back by student debt—and these are 18-to-34 year-olds with $50,000 to $250,000 in assets, or $20,000 to $50,000 in assets and salaries over $50,000. Three-quarters of these financially successful Millennials say they are still paying off their college loans.

Among investors carrying student debt, 65% say they won’t ramp up their retirement savings until they’ve paid off all their loans. But with that choice comes a lot of guilt: 45% say they regret not investing more in 2014.

Contrary to popular wisdom, millennials are committed to investing for retirement. Bank of America found that the millennials surveyed were actually more focused on investing than their elders. More than half of millennials plan to invest more for retirement in 2015. But 73% of millennials define financial success as not having any debt—and by that measure, even relatively wealthy millennials are feeling uneasy.

Fear not, millennial investors. You’re doing just fine. First off, you’re saving more — and earlier — than your parents’ generation did. A recent Transamerica study found that 70% of millennials started saving for retirement at age 22, while the average Baby Boomer didn’t start until age 35. On average, millennials with 401(k)s are contributing 8% of their salaries, and 27% of millennials say they’ve increased their contribution amount in the past year. Even if you can only put away a small amount at first, you can expect to ramp up your savings rate during your peak earning years.

For now, here are your priorities:

Save enough to build up an emergency fund. You could be the biggest threat to your retirement savings. A recent Fidelity survey found that 44% of 20-somethings who change jobs pull money out of their 401(k)s. (That’s partly because some employers require former workers with low 401(k) balances to move their money.) Fidelity estimates that a 30-year-old who withdraws $16,000 from a 401(k) could lose $471 a month in retirement income—and that’s not even considering the taxes and penalties you’d owe for cashing out early. If you have to make the choice between saving and paying off debt, at least save enough to get through several months of unexpected unemployment without draining your retirement accounts.

Pay off any high-interest debt first. When you pay off debt, think of it this way: You’re making an investment with a guaranteed return. Over the long term, you might expect a 8% return in the stock market. But if you have a loan with an interest rate of 10%, you know for certain that you’ll earn 10% by paying it off early.

Save enough to get your employer’s full 401(k) match. The 401(k) match is another investment with a guaranteed return. Invest at least as much as you need to get the match—typically 6%—with the goal of increasing your savings rate once you’ve paid off the rest of your debt.

Related:

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