Is This the Summer to Buy That Dream Beach House?
Summer is here and for many that means the annual dream of owning a beach house resurfaces – like a buoyant boogie board on a breaking wave.
Which begs the question: What would it take to make that summer house dream a reality?
First off, keep in mind that interest rates are still low and that lending rules have relaxed some, says Eric Parsons, mortgage banker and branch manager at Tidewater Mortgage Services in Rehoboth Beach, Delaware.
“People assume they have to put 20 percent down on a second home but that’s not necessarily true,” Parsons says. “You can often put less down – sometimes 10 percent – and the interest rate is no different than a primary home.”
Qualifying for a Mortgage
That said, to qualify you for a loan, lenders will look at things like cash flow. They want to see that you can pay for incidentals with cash — in other words, that you don’t have to liquidate funds out of 401Ks or stock portfolios, notes Parsons.
They’ll also look at your debt-to-income ratio. Many lenders look for less than 40 to 45 percent on your “back end DTI,” meaning that your monthly debt is no more than 40 to 45 percent of gross income, says Parsons. He cautions that you need to look at what you can afford – not at what you are pre-approved for.
Says Parsons: “You should budget for something that you are comfortable paying every single month.”
But, you might ask, if it’s a desirable property close to the beach can’t I just rent it out and make up for any shortage that way?
Yes and no, Parsons says. “Rental income helps, but you also have to prepare for a rainy day. What if you don’t rent the place during the summer? If you have water damage, for example, and you can’t rent out the property because you have to make repairs, then what?” he asks.
Part Time Vs. Year-Round Occupancy
Generally though, many beach house owners do rent out their properties for part of the year, says Jenn Barrows, a real estate agent with Ocean Atlantic Sotheby’s International Realty, also in Rehoboth Beach.
“I don’t have the exact number, but I would say about 50 percent of those who buy a beach house rent it out at least some of the time,” Barrows says.
If you are looking to rent out the property you need to think about making it “light and bright” as well as “clean, fresh, and cute.” Open floor plans and outdoor living space such as a patio or screened-in porch are also big on renters’ wish lists.
Rehoboth Beach is within a few hours of 25 percent of the nation’s population: The greater region that includes Philadelphia, the Washington metropolitan area, and Baltimore is a two to three hour drive away and New York City and New Jersey are within four to five hours. The community draws millions of tourists every year. Still, it may be difficult to cover costs through rentals unless you are getting the property as an investment property and never use it yourself – and even then it’s difficult, says Barrows.
If you’re planning to purchase the property as an investment, ask for a rental history so you can see the income that might be expected. Or, if it’s newly built, ask the real estate agent for rental histories of comparable properties (or comps) says Barrows.
There may be financial implications for renting the place out all year. The property may be considered an investment property rather than a second home, says Parsons. He recommends asking an accountant and checking with your tax consultant or the IRS to find out the implications.
Speaking of taxes, property taxes in Delaware are relatively low, says Barrows, especially for buyers from New Jersey who are used to paying thousands of dollars –sometimes tens of thousands of dollars– in annual property taxes. The equivalent in Rehoboth is a few hundred dollars a month or maybe a couple of thousand annually. In Sussex County, where Rehoboth Beach is located, for example, the average effective property tax rate is set at 0.31 percent, he notes.
Other costs to consider include whether the property needs flood insurance, a rental or business license, and if a property management company should be hired.
Enjoying Your Vacation Home
Would you want to rent out your beach house all year? Even if you want to avoid the crowds during the summer, Rehoboth Beach and other beach resorts have a lot to offer in the off-season.
“May and September are usually fabulous beach times,” Barrows says. “Adults might not want to go in the water in September or October but kids certainly do. Speaking of kids, Barrows sees people of all backgrounds and ages buying beach properties. Some are getting a second property a few years before retirement with the intention to move to the beach full-time eventually. Others with kids just need a weekend getaway in the present and a future destination for college kids coming home for break.
Another benefit of owning a beach house is it diversifies your portfolio, says Janet Redman, a financial planner.
“Even a modest appreciation can be OK, especially if you are also getting rental income and can enjoy the property yourself,” Redman says.
But just like Barrows and Parsons, she advises against thinking you can cover costs through rentals.
Location, Location, Location
When it comes to purchasing your beach house, location is as important as anything else, Barrows says. The closer you are to the ocean and the downtown area, the more expensive.
In the end, a beach home – walking distance or not to the beach – is a place where people go to relax and to get away from the hustle and bustle of daily life.
For many, says Barrows, it manifests as a physical reaction – a big exhale and overall tension release – as they get within close range of the endless shore.
“It’s the Zen of the ocean,” she adds.
Gabriella Boston is a freelance writer based in Washington, D.C. Her work has appeared in The Washington Post and other publications.
The purpose of the discussion above is for the reader’s general information only, and such information does not necessarily reflect the opinions of the author or Fannie Mae. The reader should consult his or her own attorney or other qualified tax adviser concerning the specifics of the reader’s own situation and how purchasing a vacation home may apply to your situation.