The House That Doesn’t Cost You Anything (Much)
Imagine a house that helps pay for itself.
When you’re not there it’s making money and
lifting the mortgage from your back.
As luck would have it, I wrote this chapter in my second home. My husband and I had a string of cottages on the ocean. We built them, rented them out, sold at a profit, and built again. We made some money and had a lot of fun. A vacation house that comes close to carrying itself is a dream property. It’s always on tap for your own weeks off, and the renters help you pay the bills.
But you shouldn’t think of a house like this as a true investment. It’s more like owning a pleasure palace at a discount price. You’ll almost never get enough rent to cover your costs, let alone make a profit. A portion of the cost, especially the mortgage payment and major repairs, is going to have to come out of your pocket. If property values rise enough, the house might make money after all. But to measure up as a good investment, the sale price has to be large enough to cover your previous annual losses plus interest, and deliver a compounded double-digit profit for each year you held. That’s a tall order, rarely achieved.
Back when we built our vacation houses, the profit hurdle wasn’t so high. We broke even on rentals after tax and made good money on capital gains. We got out of the game the first year we found that our costs, after tax, would exceed our rents. As a business proposition, real estate stinks if you need enormous capital gains to bail you out.
The one house we kept (and continued to put up for rent) wasn’t quite at breakeven. From an investment point of view, we’d have done better with our money in a tax-exempt bond. But it’s not much fun vacationing in a tax-exempt. It has a lousy view of the sea.
Maybe you can afford to keep a vacation home or condo without renting it out. But if you can’t, renters are fabulous. They help you carry a place that you otherwise wouldn’t own. You’re not making money, but so what? Just a look out the window—at the mountains or the beach—proves that you came out ahead.
Why do you want to own a second home? Lots of people (like me) have dandy rentals on the market. We’re the ones who have to worry about cash flow, customers, and repairs. If you rent the same place every year, it can feel like home, and you haven’t had to make a capital investment. Or you can pick the nicest and newest house each year. If you tire of that neighborhood, you can vacation somewhere else and let the owners worry about who’s going to rent it next. You can enjoy my money-losing home while putting your own cash toward reducing college debt or building up a retirement account.
One plausible reason for buying is that you’re not really investing, you’re planning ahead. You expect to retire in that home, so you’re buying it now and getting renters to help with the mortgage. But how do you know that you’ll want to live there 15 years from now? Maybe the town will change. Maybe your opinions or health status will. Maybe you’ll want a house big enough for grandchildren rather than a condo on a golf course. Maybe you’ll want to be close to your kids rather than close to the beach. Retirement homes are best chosen five years or so before you actually retire.
If you really will vacation and retire there, it’s great to get renters to help with the mortgage. But consider the home’s resale potential, just in case you want to retire in some other place.
Buy an existing house. If it has a vacation-rental history, so much the better. You’ll know what your net costs are likely to be. If there’s no rental history, ask a local real estate agent what you can charge and how long the rental season is. As a check on the agent, talk to one or two people who own rental homes nearby.
Buy a run-down rental house and fix it up. You might be able to raise the rent and rent for a longer season than the previous owner did. I said you might. There’s no guarantee that you’ll succeed.
Buy an empty lot and pay for it as fast as you can. Once the property is yours, put a house on it. You can get a mortgage for 75 to 80 percent of the combined value of the house and land. That’s usually enough to build the house and furnish it.
Buy a condominium. Older condos are usually cheaper than new ones and often just as nice. Ask a real estate broker to show you some places. If you refurnish, you might be able to get more renters. But condos are harder to rent and resell than freestanding homes. They don’t rise nearly as much in value and may even fall while house prices are going up. Better to view yours principally as a vacation home, with renters providing a little income on the side.
New condo owners should get involved with the home owners’ association. Spend a year on the board so you’ll know how the condo operates and what costs are coming down the pike. If you sense a growing resistance to paying maintenance fees, you might want to sell before the development runs down.
1. Is the house or condo in a known resort or vacation spot that’s easy to get to? For a steady supply of renters, buy where vacationers already come. You need an infrastructure—advertising, rental agents, house cleaners, and service people who make quick repairs. Your home shouldn’t be much more than half a day’s drive from a major population center.
2. Is the place large enough? The rental trade leans heavily toward families. That means at least two bedrooms and preferably three. With four bedrooms or more, you’ll tend to attract two families vacationing together. That may or may not mean higher rents but does create more wear and tear. You’ll have more rentals if you allow dogs. I do and have never had any damage.
3. Are the house and property something special? Land on water—an ocean, a lake, even a lagoon—costs more than land elsewhere. But houses on water rent for a premium and rent for more weeks each season than equally good houses back from the beach. That extra income helps you cover the higher price. In slow real estate markets, property on water sells better than those with less interesting views (provided, of course, that beach erosion hasn’t reached your front door).
In ski areas, houses with picture-perfect views of the mountains do better than houses overlooking the road. Golfers like villas overlooking the golf course. Bird-watchers like marshes. Windsurfers like bays. The best-renting condo resorts have classy amenities: pool, health club, beach. Within the resort, condos surrounded by green space rent better than those that back up on the supermarket road.
From a business point of view, homes back from the beach or with no mountain view are cheaper to buy, so check the market for lower-priced rentals. If demand is steady, you can purchase a modest place and still attract enough business to cover part of your cost. Regardless of price range, look for something a little special: a garden, a good layout, quiet woods in back. To bring in extra rent, you need an edge.
4. Is the house or condo well furnished? Today’s affluent renters won’t put up with early–Salvation Army furniture, lumpy mattresses, and campfire kitchens. They want comfort and will pay for it. So set up a convenient house with modern appliances, flat-screen TVs, good chairs and beds, plenty of lamps, and, for summer homes, air-conditioning—in the bedrooms, if nowhere else. Keep the pillows and shower curtains fresh, the grime out of the bathroom, and the screens in good repair. Your renters will repay you by returning year after year. You’ll also get a steady trade from rental agents, who like houses that clients don’t complain about.
5. Do you have a good rental agent? If you need only one or two rentals a summer, maybe you can find tenants yourself. Take pictures of the house or condo, inside and out, to show your friends, put on your Web page, or advertise on Craigslist. The Web might bring you renters from England or Japan.
To rent more often, you’ll need an agent. Look for one who’s well located on the main road, works at the business full-time, advertises widely, and is well known in the community. An agent keeps your house as full as its location, price, and condition allow, collects the rents, sends you the checks, cleans up between tenants, fields complaints, and arranges for small repairs. The commission: usually 15 to 25 percent of the rent.
Some condo resorts handle rentals themselves for commissions in the 50 percent range. That’s a greedy price, even if it includes cleanup costs. But you may be stuck. Unless you rent through the resort, your tenants might not be allowed to use the clubhouse, golf course, and pool.
6. Can you rent for enough to cover most of your cash costs? Ideally, the rents cover everything. In practice, the net rents may cover only your operating costs—utilities, routine maintenance, replacements, and small repairs. You’ll probably have to pay part or all of the mortgage and major repairs yourself. Before you buy, ask yourself: What can I afford to pay each month and each year? Can I really count on rentals to cover the rest?
If you must have extra income to maintain the house, you shouldn’t buy at all. Your financial condition is too fragile for this kind of risk. If you decide to ignore that boringly good advice, don’t take the salesperson’s word that “rentals are no problem.” Check the history of the property or properties just like it. Build in a safety margin. Could you carry the house if it rented for only half the time—or half the price—you expected? How long could you carry it if it were damaged by a hurricane, vandalism, fire, or a flood, and you couldn’t rent for a while? Your homeowners insurance will probably cover lost rents if the damage was done by a peril that the policy covers. But you won’t be paid immediately. Also, flood insurance doesn’t cover lost rents.
Buy in a Spot Where Few Tourists Come. You might love the house yourself. But don’t expect to rent it much or sell it easily.
Buy a House That’s Remote. Neither renters nor buyers will normally beat a path to your door.
Buy a Small, Dreary House or Run-Down Condo, Even in a Strong Tourist Town. Renters will avoid your property except when everything else is full. So will real estate agents, because their clients would complain. You won’t attract many tenants even by dropping your rent. No vacationer wants to be stuck in a dingy living room with grumpy kids when it rains.
Buy a Condo in an Area Where Lots of Building Is Going On. The number of new rental properties may exceed demand. If the development has no rental history, you don’t know what income you’re likely to get.
Buy Land or a Condominium in a Development That’s Not Fully Sold Out. As long as it’s in business, the development company will hog all the renters and buyers who come to visit. It won’t be easy to find someone to take your unit. That might not matter, however, if you’re sure you can hold for many years and want to be sure that you get a condo on the beach.
Respond to a Postcard That Offers “Free Gifts” for Sitting Through a Sales Pitch. In the enthusiasm of the moment, you might buy a time-share property that you don’t really want, can’t rent, and can’t resell at any price. Never, never, never respond.
Here come the city slickers, buying up country properties for a song. So how come the local yokels hum so happily when they sell? Because they know things that you don’t about the hazards of making the property pay. I’ll list just a few: (1) the boundaries may be uncertain, and you’ll have to pay to establish them (Farmer John’s old “deed plot” is not a survey); (2) the area may not be zoned, meaning that anything can be built right across the road; (3) toxic agricultural chemicals may have been buried there, which you’ll be responsible for removing; (4) you may have to drill a well; (5) it may cost a fortune to bring electric power to your castle in the woods or to rewire an old farmhouse for computer, Internet access, and fax; (6) wetlands rules will complicate your plans to build near a lake, stream, or marsh; (7) there may be easements across the land for logging, riding, or utility poles; (8) it may take years to get permission to subdivide.
That’s just for starters. When buying country property, you need a good local lawyer and real estate consultant to keep the yokels from giving you donkey ears.
My first choice is a local lender. They know the properties, have a good fix on what they’re worth, and understand the needs of buyers of second homes. Next check the Web (page 572). Compare those offers with what a local mortgage broker might suggest. Developers often offer financing for the lots, homes, or condos they have for sale. You put a small sum of money down and pay the rest over a specified number of years. Warning: that may be convenient but the terms aren’t terrific. You can almost certainly save money by doing your financing elsewhere.
Loans on second homes are usually more expensive than those on first homes. Expect a higher interest rate and extra points. You might also have to put more money down.
For a quote on homeowners insurance, go first to the company that insures your primary home. It may take your second home at a discount. If not, see what a local insurance agent can do. Some vacation-home policies reduce premiums by (1) letting you choose less contents coverage than the typical homeowners policy includes (you probably keep fewer valuables in your beach cottage than in your principal home) and (2) offering less coverage for temporary living expenses (if your vacation home burned, you wouldn’t have to live in a motel while it was being rebuilt). By contrast, you might pay more for fire and vandalism protection, because the home won’t be occupied full-time.
Whichever policy you choose, keep your liability coverage high in case a renter is injured and sues. Don’t let hazards linger. Repair the front steps, replace the bad lamp cord, stick nonskid pads on the shower floor.
See to your home’s security. It will lower your insurance premium and increase your peace of mind. Ask a home security company to set up an alarm system that notifies the police or fire department if there’s an intrusion or smoke in your home, puts a water detector bug on your basement floor, and installs a low-temperature alarm in case your furnace dies.
Don’t buy a house that you cannot fully insure unless you’re rich enough not to care. Theft and vandalism coverage might not be granted to remote cottages. Fancy beachfront homes might cost more to rebuild than the maximum $250,000 that flood insurance policies paid in 2009 (plus up to $100,000 for contents). Without insurance, a lot of your equity is at risk.
You need someone to check the house regularly for storm damage and needed repairs. If there’s no alarm system, the house also has to be checked for burst pipes, vandalism, a dead furnace, and other problems. If you put up the house for rent, the rental agent may provide this service. Otherwise ask for recommendations from other vacation-home owners in the area or a contractor you trust. Some possibilities: a neighbor who might want to make a little extra money, the handyman at a local apartment house or condo complex, or a local police officer or firefighter. You’ll also want to keep the lawn cut and the garden weeded, so the house looks good.
Some of the rules that apply to your principal residence apply equally to a second home. You can deduct mortgage interest, property taxes, and casualty losses.
You lose your interest deductions, however, for a third house, a fourth house, and so on up. That is, unless they’re business properties, in which case they operate under different rules (page 607).
You’re taxed on your profit when you sell a vacation home. At this writing, the federal capital gains rate is 15 percent, plus any state taxes due. If you rented the house when you weren’t there, you may owe extra taxes under the depreciation recapture rules (see your accountant about them). There’s a strategy for reducing these taxes, used especially by new retirees: move into your vacation house for several years and sell it then. It will have become your principal residence and a portion of the gain can be excluded from tax. The exact amount of your tax-free gain will depend on how long you’ve owned the house, the number of years you rented it, and the number of years you lived there yourself.
When you rent your house or condo to others, what’s deductible depends on your income, your involvement with your rental property, and how much you use the house yourself. Here are the general rules.
Your rental home is treated as a personal residence if you use it more than 14 days a year, or more than 10 percent as much time as you rent it, whichever is greater. Days you visit the home to make repairs and attend to your rental business are not counted as personal use. On the other hand, if you rent to a relative or friend at something less than the going rate, that is personal use.
All your expenses are allocated between business and personal use. If the house is rented 40 percent of the total number of days it’s used, then 40 percent of the overhead—interest, taxes, utilities, repairs, maintenance, rental costs, depreciation—are business expenses.
When preparing your income taxes, you would normally:
1. Figure the portion of interest and taxes that applies to your personal use and deduct it along with your other itemized deductions on Schedule A.
2. Report the rental income on Schedule E. Deduct from it, first, the portion of interest and taxes that applies to the rental use of the property. After that, deduct the business portion of your insurance and maintenance costs. Finally, deduct depreciation. But your total allowable deductions cannot exceed your rental income. In most cases, that means that some expenses will go unused.
3. If the business portion of your interest and taxes exceeds the rent, the remainder can be deducted with your personal expenses on Schedule A.
4. Other unused business expenses can be carried forward to future years. If you hold the property long enough to pay off the mortgage, your rents may start to exceed your current expenses. At that point, you can start deducting unused expenses from previous years.
There’s a twist to the rules if you rent for fewer than 15 days. You don’t report that rental income on your tax return, and you can’t deduct any rental expenses except those for taxes and mortgage interest.
Your rental home is treated as a business property if your own use amounts to no more than 14 days or 10 percent of the time that you rent it, whichever is more. You allocate expenses to personal or business use, just as you would if it were a personal residence. But in this case, you cannot deduct the mortgage interest and taxes for the short time that covers your personal use. On the other hand, you get a break when you want to sell. You can do a tax-free exchange for a different property (talk to an expert in commercial property transactions about this). If you sell at a loss, that loss is deductible from your ordinary income.
If a rental agent manages your house or condo: You can normally write off expenses only against your rental income or any income you’re getting from other passive investments—meaning businesses where you’re a silent partner. You will probably have excess expenses that can’t be deducted currently. Just carry them forward. Unused expenses can be deducted from the profits on this or any other passive investment when you sell.
If you manage the property yourself or actively participate in the management: In general, this covers people who find their own renters, collect the money, and handle maintenance and repairs. You may be able to write off all the expenses, even if they exceed your rental income. That creates a tax shelter. Some of your ordinary earnings are protected from tax.
You qualify for this shelter if you meet one of the following tests: (1) Your adjusted gross income (not counting income and losses from other shelters) doesn’t exceed $100,000. In this case, you can write off up to $25,000 in business losses, including depreciation. (2) Your income falls between $100,000 and $150,000. Over that range, the $25,000 deduction gradually phases out.
There’s one exception: you will not qualify for tax shelter if your tenants, on average, rent your house for fewer than seven days at a time. In short, there is no tax break if you own a ski condo that attracts principally weekend renters.
If you’re entitled to the $25,000 exemption (few are), it’s better to have a business property. Ditto if you plan to buy and sell because you can do a tax-free exchange. Otherwise, flunk the business test by using the home more than 14 days. That way, you get an unlimited deduction for mortgage and taxes.
If you can’t afford a house and you can’t afford a condominium, maybe you can afford a piece of a condominium.
That’s a time-share. You generally buy the right to vacation in the same unit during the same week every year. If you buy a “floater,” you can be put into any unit of the size you contracted for. Your basic cost might be $7,500 to $25,000. There are also monthly maintenance costs and special assessments. If you finance your purchase, you might pay as much as 16 percent interest, and it’s usually not tax deductible.
The most desirable time-shares are in spiffy resort areas—on the beach, by a golf course, on the Mediterranean, or near Disney World—and in the high season. You can buy for cash or on terms. You have to pay regular maintenance fees to keep the property clean and in good repair. Some resorts find you a tenant if you can’t use your regular week (you pay a rental commission of 25 to 50 percent). Or you may be able to swap, using someone else’s unit in a different resort in return for letting a stranger make use of yours.
Time-shares are sold as “prepaid vacations”—locking in today’s prices for the rest of your life. But that’s not quite true. (These days, what is?) Your annual real estate taxes and maintenance costs will rise. Many resorts hit you with extra assessments—in the $500 to $1,500 range—for major improvements or repairs. It might be 10 to 20 years before owning the time-share actually becomes cheaper than renting the unit every year, even projecting an annual increase in rents. Will you still want to visit the time-share 21 years from now? Really?
If you do buy, stay away from the developer’s mesmerizing (and misleading) sales pitches for new units. Older units cost less and may look just as good. See if there’s a bulletin board listing resales, ask any unit owners you run into during your visit, check time-share Web sites (page 610—there are tons of time-shares for resale), or call a local real estate agent. If you see an older unit that you like, make a low offer. You can probably buy a time-share for 25 percent of the developer’s price or less. Some people who bought for $15,000 will be thrilled to get out at $1,000—and they’ll let you pay in installments too. Many time-shares are given away, just to get them off the owners’ backs.
1. A time-share is a cheap vacation, especially for a family. (But renting a time-share unit is cheaper than laying out the money to buy it. You can rent at the same resorts that are trying to get you to buy.)
2. You see some of the same friends around the swimming pool every year. (But the same will be true if you always rent at the same time.)
3. You can swap for a time-share in other parts of the country or elsewhere in the world and get a unit of about the same quality, and in a similar season, as yours. (But you may not be able to swap for the places and times you want. That’s especially true if your own unit isn’t in a top-drawing location or the most desirable season. Renters, by contrast, can pick any kind of time-share they want—anywhere, anytime—without negotiating a swap.)
4. You can rent the time-share if you can’t use or swap it in any year (assuming you can find a renter—not easy).
5. If you hold and use the time-share for 10 to 20 years, your regular vacations will probably cost less than if you’d rented every year. (But your vacation choices have been limited, and when you’re finished with time-share living, you probably won’t be able to get rid of your contract and its ongoing—and increasing—maintenance fee. When you add up all those later, unused years, you’ll find that your vacations were very expensive indeed.)
1. Unless you buy a good time-share—a desirable place, a desirable unit, a desirable week—you might not be able to make a good swap. You’ll be stuck every year with the unit you have or a unit of indifferent quality, at an inconvenient time, in a place you might not want to be. If you own an off-season week, you generally can’t swap for a week at a better time of year.
2. If the resort runs downhill in the future, you won’t want to go there anymore—and neither will anyone else. If your life pattern changes and you don’t use the time-share, you’ll be paying for a vacation you no longer take. You cannot count on getting a renter when you’re not there.
3. You’re stuck with the contract if your lifestyle changes—for example, if you get divorced, if your spouse dies, and when you get older and don’t want a family atmosphere anymore. The monthly maintenance fees and assessments keep on running (and rising!), whether you visit or not. These can be real burdens to widows or widowers who don’t have the money to carry a unit they don’t want and can’t use.
4. You will almost certainly not make money on the time-share unit itself. The day will come that you’ll be begging people to take it off your hands.
5. If you do manage to sell, you’ll take a loss—probably a huge one. Even worse, the loss is not deductible. I suppose there are rare birds who do indeed sell time-shares at breakeven or at a profit, but I’ve never met one. Count yourself lucky if you find a buyer at all.
How I Sold My Time-Share would be one of the world’s thinnest books. This deal is easy to get into but hard to get out of. Almost all the new buyers are grabbed by developers, not by individuals with units to resell.
The first rule of resales is to slash your price! Check the Web sites below to see the asking price of comparable units. Often, they’re in the $500 to $1,000 range and probably sell for less. I’ve seen them on eBay for $1. Owners like these are effectively giving their time-shares away just to get out from under the monthly payments and special assessments. Here are some other ideas, but don’t count on any of them to working for you.
1. Ask the developer. Sometimes they handle resales, but only in popular resorts where no more new units are being built. Typical commission: 25 to 50 percent. You might also be able to post on a bulletin board or list your time-share in the resort’s newsletter.
2. Post an ad on the Web. You might be lucky enough to find some suck—, um, buyer there. Try eBay and Craigslist. Post on the free newsgroup sections of MSN, Yahoo!, and AOL. Go to specialized sites such as the Timeshare User’s Group at www.tug2.net, which has lots of good consumer advice for time-share owners; MyResortNetwork.com (www.myresortnetwork.com); or Sell MyTimeshareNow (www.sellmytimesharenow.com). Post pictures of your unit. Offer extras, such as a free rental week to try it out.
3. Print some pretty for-sale flyers. When visiting your unit, pass them out to the people lounging by the pool. Maybe they’d like to add to the week they already own. Get ’em now, while they’re still happy. You have a shot if the time-share is obviously a going concern, with assessments apparently under control.
4. List with a time-share resale broker in the city where your unit is located or on the Web. (Try to ignore the broker’s chuckle when you ask what the unit will sell for.) You’ll pay a commission if the time-share does indeed sell, but you should not pay an up-front fee. Be sure you understand what services will be provided. And don’t expect any broker to sell a unit that’s overpriced.
Some brokers take advantage of owners desperate to resell. They’ll claim they have buyers and ask you for an upfront “listing fee” or “appraisal fee” of $100 to $500 or more. Your property will sit on the list indefinitely, you won’t get a buyer, and you’ll never see your money again. Other brokers will claim that they want to buy your time-share but require that you get an appraisal (from a company they control). You pay for the appraisal, but your sale never closes. Some offer to take your time-share off your hands if you pay them $3,500 or more. You pay but may find that the deed hasn’t actually changed hands.
5. Look for a charity that accepts donated time-shares. Normally, it will accept only time-shares that can be resold quickly, which rules out the majority of donations. (If you could sell, you’d have done it yourself.) Some charities might list your time-share for a fee and accept the donation only if it already has a buyer (it makes money on the fees).
If your donation is accepted, you can generally treat it as a tax-deductible gift. But you can deduct only the time-share’s fair market value, which, as you learned from trying to sell it, is pretty low. The chief value of the donation is to get it off your hands.
6. Some Web sites tout a unilateral quit claim deed. You deed the time-share back to the resort and walk away. But the resort doesn’t have to accept the deed and almost certainly won’t if you still owe money on the original purchase. It will list you as a deadbeat for not paying the monthly maintenance and report you to the credit bureau. It might take a time-share back, however, if all it would lose is the monthly maintenance fee and it thinks it can resell it. You have to negotiate this; you can’t just walk away.
How can you get out of a time-share that you haven’t been able to sell? You probably can’t if you’re only a year or two into the deal. If you quit paying, you’ll be sued and your credit report will be wrecked. If you’ve paid for the unit, or almost paid, and decide to walk, you might not be sued for your annual fee or any remaining money due. But the default will still show up on your credit history.
Some developers will take the unit back if there’s a lot of demand for time-shares in their resort. You get no money for the time-share, but at least you’re off the hook. That would be a huge relief to widows or widowers who can’t afford the payments.
If you can’t get rid of the time-share and die, your heirs will probably inherit it. The time-share company may try to get the heirs to pay. But they weren’t part of the contract and don’t owe the company a dime. The heirs should simply ignore the contract. Let the unpaid fees pile up! At this point, you’re past caring what’s on your credit report.
You can get a lovely place for far less than the weekly cost of a hotel or motel. Good rental time-shares offer one to three bedrooms, a kitchen, a living room, and access to lots of amenities: swimming pool, golf course, tennis court, and local entertainment. If you love the resort, you might go every year when the children are small. Or you might try other places. The important thing is that you’re not tied down financially and not stuck with something you can’t sell. When the kids grow up, you can say ta-ta to the family vacation and try something else. You can also rent condominiums that aren’t used as time-shares. Condo resorts are usually top of the line. Just call a resort you’re interested in or look for time-share rentals on the Web. Condo and time-share rentals direct from the owner should cost less than those offered through the office of the resort.
Resorts often offer vacations at a discount if you’ll sit through a sales pitch for time-shares, aimed at getting you to buy right now. Expect the salesperson to tell you that time-shares are a terrific investment (they’re not), that they “lock in today’s vacation price” (not so—fees and assessments will rise), and that they’re easy to resell (fat chance). Buy only if you know that you’ll want to vacation at this resort, or others like it, for as many years as you can imagine, with your family or without, paying annual fees until the end of time. …
Buy from one of the tens of thousands of unhappy people trying to resell. Resales are available through the Web or through real estate agents. You might get a splendid unit at 75 percent or more off the developer’s price. Some are free; all you have to do is take over the annual maintenance.
Before signing any time-share contract, go to Web sites such as Timeshare Trap (www.timesharetrap.com) and read about the experiences of people who’ve bought time-shares joyfully and then couldn’t get out. Time-shares are far more complicated than they seem at the start.
If you still want to own, go through all the clauses in the contract and decipher the rules. What are the monthly maintenance fees? How often do they rise? What special assessments might (rather, will) you have to pay? What do you actually own—a deeded fraction of the property as a whole or a right-to-use contract for a specific time? (Right-to-use contracts eventually expire and can be reasonable buys if they’re not far from their expiration date.) Can you sell to someone else (assuming you can find a buyer), or are resales prohibited? Do you get the same unit every year? If you’re offered a “bonus week,” when can you take it? What happens if some of your fellow owners stop paying their share of the costs (inevitable when they get soured on the deal)? What if someone is injured in your unit? What if the developer doesn’t finish the project, leaving you without some of the promised amenities? How is the property owners’ association run, and what are its rules? How does the time-share exchange program work—what does it cost, and what kind of unit can you expect in an exchange? If the exchange program works on the “point” system, how many points is your unit worth, how many points do you need to swap for units you’d like in other resorts, and, if you want to upgrade, how much do extra points cost? Who manages the property? (You want an independent company that’s in the hospitality business, not a subsidiary of the developer.) Is your unit a “lockout” (meaning that you could divide it in two, occupy part of it, and put the other part into an exchange program)?
Don’t buy from a resort that lures prospects with free gifts. Or from salespeople who imply that you’re making a good investment. Or if you’re told that “today only” there’s a discount price. Or without taking home the sales contract and other ownership documents to read and consider quietly.
Stick with a nationally known company, of good reputation, whose resorts you have visited and liked and whose salespeople don’t hustle you. If there is such a combination.
Like a first home, a second home does double duty. It’s a place to live and has elements of an investment. It forces you to save (assuming that prices hold up so that you can build equity). It costs you money as long as you own it, in interest, insurance premiums, taxes, improvements, and repairs. You hope at least to break even by selling the house for enough to cover the purchase price plus all those additional costs. If you’re lucky, you might even sell it for more. If you’re unlucky, you’ll sell for less and can’t sell in a hurry, except at a discount price.
When you own two homes, you need the protection of cash in the bank to pay the mortgages just in case your income stops. If you’ve tapped all your cash to buy the house, make it your top priority to build up your liquid savings again.