Buying out of state real estate
January 23, 2006 1:30 PM Subscribe
Help me learn a bit more about buying property in another state.
Currently I live in California but dream of moving to the midwest. I've found an area that I'm considering, but I don't know how things would work out with taxes & stuff.
1)Would the property be a tax break? It's not a second home since I don't already own a home - I have an apartment here.
2)I don't really want to purchase it as a rental property, but I would like to visit it several times a year.
3)The property values in the area are affordable enough that I could literally save up for a few years and put a huge down payment on a property. The current thinking is to save up a bit while I finish schooling out here, since oddly enough, college is cheaper out here.
Have any of you done something like this? I've been reading that a huge percentage of the homes being purchased in markets like Phoenix, AZ and Las Vegas, NV are made by 'snowbird' types as second/vacation homes. If there are no tangible benefits, why would someone take on such a feat?
I've considered talking to real estate agents but I don't think they're geared towards helping not-planning-on-buying-right-now types.
So, residents of the lazyweb, tell me the good and the bad, if you'd be so kind.
Currently I live in California but dream of moving to the midwest. I've found an area that I'm considering, but I don't know how things would work out with taxes & stuff.
1)Would the property be a tax break? It's not a second home since I don't already own a home - I have an apartment here.
2)I don't really want to purchase it as a rental property, but I would like to visit it several times a year.
3)The property values in the area are affordable enough that I could literally save up for a few years and put a huge down payment on a property. The current thinking is to save up a bit while I finish schooling out here, since oddly enough, college is cheaper out here.
Have any of you done something like this? I've been reading that a huge percentage of the homes being purchased in markets like Phoenix, AZ and Las Vegas, NV are made by 'snowbird' types as second/vacation homes. If there are no tangible benefits, why would someone take on such a feat?
I've considered talking to real estate agents but I don't think they're geared towards helping not-planning-on-buying-right-now types.
So, residents of the lazyweb, tell me the good and the bad, if you'd be so kind.
Response by poster: I'm still paying attention, sexymofo, and thanks for the reply. :-)
posted by drstein at 10:03 AM on January 24, 2006
posted by drstein at 10:03 AM on January 24, 2006
Best answer: sexymofo has it pretty much nailed. A couple of elaborations:
You can take mortgage (interest portion only) and property taxes on second homes as a deduction (in general; there is a limitation on mortgage deductions that affects the really rich), but what that's worth depends on your tax bracket. If the highest rate you pay is (say) 25%, then each dollar you pay out results in saving only 25 cents in federal taxes.
It sounds like you are considering moving to the Midwest at some point. Unless you're worried that housing prices will jump sharply, there is little reason to buy now as opposed to later. In most people's opinions, housing prices are unlikely to show much growth in the next few years. And even if they do, in places like California, housing prices are not likely to rise significantly in the Midwest, where there is generally plenty of land to build, and relatively low population growth.
Finally, in general, it doesn't make much sense to put a large down payment on a house, if that uses up most of your savings. You're now illiquid (you don't have money for a major emergency, or much margin of safety if you lose your job, get badly injured, whatever), and a big downpayment doesn't reduce your monthly payments that much. It also reduces your tax deduction (on mortgage interest). Much wiser to pay 20% down (to avoid PMI, which is a ripoff), keep 3 to 6 months of (net) income in fairly liquid form (money market, for example), and invest for the longer-term with the rest.
posted by WestCoaster at 11:42 AM on January 24, 2006
You can take mortgage (interest portion only) and property taxes on second homes as a deduction (in general; there is a limitation on mortgage deductions that affects the really rich), but what that's worth depends on your tax bracket. If the highest rate you pay is (say) 25%, then each dollar you pay out results in saving only 25 cents in federal taxes.
It sounds like you are considering moving to the Midwest at some point. Unless you're worried that housing prices will jump sharply, there is little reason to buy now as opposed to later. In most people's opinions, housing prices are unlikely to show much growth in the next few years. And even if they do, in places like California, housing prices are not likely to rise significantly in the Midwest, where there is generally plenty of land to build, and relatively low population growth.
Finally, in general, it doesn't make much sense to put a large down payment on a house, if that uses up most of your savings. You're now illiquid (you don't have money for a major emergency, or much margin of safety if you lose your job, get badly injured, whatever), and a big downpayment doesn't reduce your monthly payments that much. It also reduces your tax deduction (on mortgage interest). Much wiser to pay 20% down (to avoid PMI, which is a ripoff), keep 3 to 6 months of (net) income in fairly liquid form (money market, for example), and invest for the longer-term with the rest.
posted by WestCoaster at 11:42 AM on January 24, 2006
Response by poster: Thanks to both of you that responded. :)
posted by drstein at 9:59 AM on January 30, 2006
posted by drstein at 9:59 AM on January 30, 2006
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I'm not a financial planner but I would think that buying non-rental, non-residence out-of-state real-estate is probably not a great strategy.
Yes, you will benefit from tax breaks, that is, you can write off your mortgage and property taxes. But on the downside, you'll have to PAY mortgage and property tax for property you don't live in and doesn't generate income. Plus, you'll have to maintain the place and since you can't do it yourself, you'll probably have to pay someone to do it for you. (Unless you know someone in the area.)
The reason why snowbirding works out is because the snowbirds live a great deal of time in each residence. If you are just visiting several times a year for short periods, staying at a hotel would probably be more economical. I'm assuming the those with vacation homes have a ton of money--and if you were in that situation, you'd probably be talking to your accountant.
Buying land (instead of a house) might be an option since you get to stake out your claim and the maintenance worries are far less. Plus, you have a place to stay when you visit. (You do own a tent, right?)
For what it is worth, I would save and wait to purchase when you are ready to move full-time. Plus, if you change your mind, you have the option of looking elsewhere.
posted by sexymofo at 5:03 AM on January 24, 2006