Unable to afford a home in the city, more people are buying vacation homes instead

By Anna Bahney | CNN Business

Second homes aren’t just for the very rich.

With median home prices in cities like
New York
and
San Francisco
hovering around
$1 million
, some
first-time buyers
are choosing to remain renters in their home
city and they’re buying a vacation property in a more affordable
area instead.

“I’m seeing this more and more,” said Svetlin Krastev, an
investment advisor with Black Sea Gold Advisors, in Kingston, New
York. “People want to have exposure to real estate, but it would
take all of their assets to get a residence in the city.”

A place to live, and a
place for living

Bart Higgins, founder of an innovation consultancy firm, rents a
four-bedroom converted warehouse in Brooklyn’s Fort Greene
neighborhood with his wife and twin five-year-olds. The couple pays
$5,300 a month.

“If I was going to buy that, it would be between $2 to $3
million,” he said. “I would have to manifest $600,000 in cash.
I can’t get my head around it. I can’t find a way to
rationalize that burden.”

That’s why they bought a home — a compound with three
buildings on 33 acres with a lake — near Kingston, New York, for
$300,000.

“We bought our first home as a second home as a way to relieve
the pressure and buy us some time.”

And instead of coughing up $600,000, they made a $40,000 down
payment, said Higgins. “It made more sense for us to put our
money there and Airbnb has allowed it to become a net zero for
us.”

But the rush to get there on the weekends — loading up the
car, two hours of traffic, kids crying — just so they can relax
for a little more than 24 hours before heading back home to the
city is taking a toll, he said.

“Still, for now we live in Brooklyn, as renters,” said
Higgins. “But we have a real life upstate in Kingston where we
have more time by the fireplace, exploring the woods and finding
salamanders by the pond on the weekend.”

Does it make financial sense?

If the ultimate goal is to buy a primary home in an expensive
city, the numbers for buying a second home first do not add up,
according to JP Geisbauer, a certified financial planner at
Centerpoint Financial Management.

“Having a loan commitment on a second home will make it that
much more difficult to buy what will be used as a first home,” he
said.

People living in cities where there is rapid home price growth
often overestimate the appreciation of homes in more rural areas,
even if they are vacation areas, he said. And there is also an
opportunity cost for what else could be done with that money over
the time of ownership.

But it can be a good idea for some people.

Starting with a second home can be a reasonable choice for many
urban professionals, said Malissa Marshall, a certified financial
planner with Soaring Wealth. “The ability to rent out the
property easily on home sharing sites makes it a more affordable
way to grow equity.”

Instead of taking on a big mortgage in the city, a smaller
mortgage for a vacation home may not only be more manageable month
to month, but could also have some relative tax advantages.

Homeowners can deduct their mortgage interest on their income
taxes on home loans up to $750,000.

“In New York City, $750,000 doesn’t go a long way,” said
Krastev. “But when you buy a home for $300,000 or $400,000, you
can get that mortgage interest deduction.”

Why wait for a second home?

Caleb Mulvena knew that buying a home on a lake near Morris,
Connecticut, while continuing to rent an apartment in Brooklyn did
not make much financial sense. But, he said, it made emotional
sense.

By the time Mulvena felt financially prepared to buy a home in
New York City, where he runs his own architecture firm, he and his
wife already had two children with a third on the way. A
frustrating search for a suitable family apartment forced a
choice.

At the time, in 2015, they were renting a place they loved in
the Brooklyn neighborhood of Park Slope, with their school around
the corner and friends nearby. “The only way we could afford to
buy would be to move to a whole other area and another school. It
was depressing.”

So they decided to stick with the rental as long as they could.
One of the country homes they’d been eying for two years had a
25% discount. Mulvena felt this was their chance.

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“We could buy a place outside of the city with a price that is
manageable and is offset with Airbnb rentals. Then we’d have a
place for the kids and us to go to and play and relax.”

They bought the three-bedroom, two-bath, lakefront cottage and
enjoy it year round, kayaking in the summer and skiing nearby in
the winter. They upgraded the stove in the kitchen, but otherwise
did very little to it and rent it out on Airbnb.

“From a financial perspective, it doesn’t make sense.” he
said. “It may never accrue value. But we have to think of it as
an investment in our emotional well-being and experiences
now.”

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Source: FS – All – Real Estate News 1
Unable to afford a home in the city, more people are buying vacation homes instead