Many second-home owners – especially those in the full-time vacation rental business – are looking to purchase another property, but often face stringent financing guidelines. The same challenges, even with historically low interest rates, are plaguing first-time investors seeking to get started.
Christine Karpinski , the author of How to Rent Vacation Properties by Owner and Profit From Your Vacation Home Dream, offers financing observations:
It’s cheaper to borrow, but it’s also much tougher. The easy money days are over. In fact, you probably already know that loans are not easy to get in the post-housing crisis economy. If you plan to take out a mortgage on that vacation home you want, be prepared to put more money down – 20-30 percent is the going rate for investment properties.
Homeowners associations and building associations are under the microscope. Lenders are scrutinizing these associations more closely than ever. When members were unable to pay their monthly dues during the throes of the housing crisis, many homeowners associations went into the red. Lenders are conscious of these problems and don’t want to lend money for a building or property where there is no money to take care of it.
Expect appraisers to be more stringent than they once were. This is actually a bittersweet thing for the buyer because it means the appraisal amount will be more accurate (i.e., not inflated) than it might have been years ago.
Investors who want to focus on second homes have begun to consider alternative methods for financing including reverse mortgages, individual retirement accounts, tax-deferred exchanges from commercial properties and seller financing.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. However, funds may be used for any reason. Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax free.
The rules for purchasing real estate with an individual retirement account (IRA) are specific and differ greatly from those that govern conventional rentals and second homes. For example, you cannot buy a second home with an IRA and use it partly for personal use, even though you might rent it to unrelated persons the rest of the year. And, an IRA cannot purchase a real estate asset and then have a „disqualified“ person (family member) use it while it is in the IRA. The purchase must be for an investment property and no personal use – until retirement. Then, the individual can move in to the property and pay tax as if taking a disbursement from a conventional account.
A tax-deferred exchange (commonly known as IRS Section 1031 Exchange ) is really an arm’s-length sale and purchase. The transaction proceeds just as a sale for you, your real estate agent and parties associated with the deal. However, provided you closely follow the exchange rules, the IRS will „sanction“ the transaction and allow you to characterize it as an exchange rather than as a sale. Thus, you are permitted to defer paying the capital gains tax.
An exchange occurs when you trade real property that is other than your home or second residence for other „like kind“ real property that you have held for trade, business or investment purposes. The like-kind definition is very broad. You can dispose of and acquire any interest in real property other than a home or a second residence. For example, you can trade raw land for income property, a rental house for a multiplex, or a rental house for a retail property.
Take some time to consider your financing options. You just might find a new way to get in the door.

Sentiment rank: -1.7

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Stocks are down slightly Wednesday after an early rally ran out of steam. Technology stocks are up after Apple said iPhone sales improved in its last quarter, which sent its stock to its highest price in more than a year. Most other stocks are trading lower. Companies that pay big dividends, like utilities, are taking some of the biggest losses.
KEEPING SCORE: The Dow Jones industrial average lost 2 points to 19,861 as of 12:20 p.m. Eastern time. The Standard & Poor’s 500 index lost 4 points, or 0.2 percent, to 2,274. The Nasdaq composite added 12 points, or 0.2 percent, to 5,626. The Russell 2000 index of smaller company stocks declined 3 points, or 0.2 percent, to $1,359.
The market has made only small moves in recent days as investors wait for the Federal Reserve to wrap up its latest policy meeting later Wednesday.
APPLE POLISHED: Apple jumped to its highest price in a year and a half after it said consumers snapped up its new iPhone 7 and 7 Plus over the last three months. That ended the first-ever slump in iPhone sales, and Apple’s first-quarter results were stronger than analysts expected. Its stock rose $7.32, or 6 percent, to $128.67. The big gains for Apple, the world’s most valuable publicly-traded company, took technology stocks higher.
Chipmaker Advanced Micro Devices also climbed $1.42, or 13.6 percent, to $11.79. AMD reported a profit when analysts expected a loss, and its sales were greater than expected.
JOB GAINS: A survey showed private U. S. employers hired new workers at a faster pace in January, a sign that the economy could be getting stronger. The hiring was greater than expected, and the construction, manufacturing, health care and shipping industries all adding jobs at a solid pace.
The U. S. government will release its own monthly jobs report Friday.
BONDS: Investors reacted to the hiring report by selling government bonds, which are relatively safe investments that are in greater demand when the economy seems weaker.
Bond prices fell. The yield on the 10-year Treasury note jumped to 2.50 percent from 2.44 percent. Financial stocks rose, as higher interest rates allow banks to charge more money for lending. Lincoln National climbed $1.53, or 2.3 percent, to $69.04 and JPMorgan Chase rose 66 cents to $85.29.
Stocks that pay large dividends traded lower as bond yields rose. Dominion Resources dropped $4.26, or 5.6 percent, to $72 after a weak quarterly report.
THE PITS: Mailing equipment and software company Pitney Bownes slid $2.71, or 17.1 percent, to $13.21 after its quarterly sales fell short of expectations and its profit forecast disappointed Wall Street.
ENERGY: Oil prices stayed within a small range. U. S. crude added 19 cents to $53 a barrel in New York. Brent crude, the benchmark for international oil prices, gained 32 cents to $55.90 a barrel in London. U. S. oil has stayed between roughly $52 and $55 a barrel for the last two months.
The S&P 500’s energy company index is on track to fall for the fifth day in a row. It’s down 4 percent over that time and has sunk 7 percent since Dec. 13.
ALUMINUM ACTIVISM: Lightweight aluminum products maker Arconic surged after its largest shareholder said the company needs new leadership. Elliott Management nominated five potential directors to Arconic’s board. The company said it stands by CEO Klaus Kleinfeld and that Elliott’s moves are not in the best interest of all shareholders.
Arconic makes lightweight engineered products for aerospace and autos, which some investors saw as more promising than Alcoa’s mining and smelting business. But since the companies split on Nov. 1, Arconic stock is almost flat and Alcoa has jumped more than 60 percent. Arconic gained $2.11, or 9.3 percent, to $24.84.
CURRENCIES: The dollar gained strength after the jobs survey. It rose to 113.43 yen from 112.76 yen. The euro fell to $1.0752 from $1.0803.
OVERSEAS: Stocks in Europe got a boost from the ADP survey and a report that said manufacturing in China grew at its fastest pace in two years in January. Heavy government spending and more lending by banks helped keep the economy steady. Germany’s DAX added 1 percent while the CAC 40 of France rose 0.9 percent. The FTSE 100 index in Britain picked up 0.1 percent. Japan’s Nikkei 225 rose 0.6 percent after a skid on Tuesday. The Kospi in South Korea jumped 0.6 percent. Hong Kong’s Hang Seng fell 0.2 percent.

Sentiment rank: 6.3

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