Cash-Strapped Buyers Are Investing in “Second Homes” First. Here Are 5 Things to Know Before You Try It.
When Sarah Tracey and her best friend Jim Glaub were quarantined together during the COVID lockdown in Brooklyn, they started dreaming of a country house they could slip away to for long weekends. Then, when they weren’t using it, perhaps they’d stick it on the short-term rental market.
One wine-fueled evening spent Zillow scrolling led them to a charming 18th-century Dutch stone farmhouse in the Hudson Valley. They scheduled a viewing and the rest, as they say, is history.
Tracey and Glaub are now the proud owners of what they’ve dubbed Black Walnut Farm, which they’ve completely rehabbed and remodeled.
Tracey could have spent her down payment fund on a small studio apartment in New York City. Instead, she continues to rent in the city. By pooling funds with Glaub, she turbocharged her buying power to purchase the historic house and barn on 34 acres, and got the hideaway she dreamed of upstate.
While this order of operations may seem unorthodox, buying a secondary home before a primary one is a move that many first-time millennial and Gen Z buyers are experimenting with in this unprecedented market. They’re part of a growing group called SHIFTers (which stands for Second Home Is First Time purchase). Whether they’re touring open houses with friends or using “co-buying platforms” like Nestment to purchase a home with others, there’s no doubt the flexibility of remote and hybrid working arrangements have helped accelerate the trend.
For those who need to be in a metropolitan office a couple of days a week but have the option to work from home, too, why not widen the home-buying search radius?
Since the onset of the COVID-19 pandemic, Ian Katz, a real estate broker with Compass in New York City, has been noticing more buyers looking outside of their high-cost urban areas to alternative markets like the Hudson Valley in New York and the Sun Belt in Texas, Tennessee, and Florida, where they can find high-end properties for much less than those in their primary markets.
In a survey of potential first-time homebuyers by Consumer Affairs, 80 percent said they’d consider purchasing an investment property in a cheaper market than the one they currently live in. (Gen Z was the most comfortable going this route, per the study.) For those interested in turning their first home into an investment property, 88 percent said they’d prefer to rent to a long-term tenant instead of posting short-term listings, the survey says.
There are pros and cons to buying a secondary home before you have a primary one, though. On the plus side, you could build equity and have rental costs offset your expenses. On the downside, mortgage requirements can be tougher for SHIFTers.
I spoke with Katz and a few first-time buyers who’ve bought a second home first, asking them to share what others should know if they go this route. Here’s what they had to say.
Know the short-term rental rules.
Because Tracey was already paying expensive New York City rent, she was counting on her short-term rental income to offset costs of her vacation home mortgage.
“Anyone who’s in a similar position should be sure to check with the town and county where you want to buy before making an offer,” she says. “In some areas, short-term rentals are prohibited or extremely restricted, or there could be permitting or requirements that don’t work for your situation. You want to know that before falling in love with a home and getting into a contract.”
Be prepared for a slower pace.
If you’re renting in the city and decide to buy in the country, be aware that things often move at a slower pace in rural areas, so you’ll need to adjust your expectations, Tracey says. It might take a while to find service professionals and contractors that have availability, she explains, and obtaining permits for construction projects can take a while.
Speaking of permits: Tracey points out you can’t just do whatever you want with your own land.
“As a lifelong renter, that was a big surprise,” she says. “The local municipality needs to approve many projects, so work with a contractor who knows the local regulations and bureaucracy.”
Keep an eye on “bubble pricing.”
Many secondary home markets have become much more expensive over the past three years, as new segments of buyers with exceptional buying power have acquired land and property at all-time high numbers, Katz says.
“While there are good foundational ‘second home’ markets, like those in South Florida and Texas, where the fundamentals of low taxes and corporate relocation should create a resilient high-performing market in the future, there are many which haven’t seen as much permanent relocation and are more susceptible to price deflation as we retreat to pre-COVID living,” Katz says.
Bubble pricing, BTW, happens when the price of housing rises quickly because of factors like high demand and low inventory, which pretty much defined the era of pandemic home-buying. Now, interest rates are higher and there are signs that the real estate market is cooling down (thus shrinking or eventually even popping the bubble).
Consider a “cost segregation” study on the property.
If you’re purchasing an investment property, ask your accountant about having a cost segregation study completed on it, suggests Skye Sherman. Sherman is a travel writer who, with her husband, bought two properties in West Palm Beach that she rents out on Airbnb.
It’s a pricey study that costs between $2,000 and $5,000, but could potentially save you thousands in taxes, she says, by pinpointing assets that can depreciate over a shorter period of time. This often leads to a bigger tax write-off the year you purchase the property.
Sherman says she and her husband are looking to buy a primary residence in the next year or two. The couple took a page from entrepreneur and author Grant Cardone, and purchased something that pays for what they want rather than going straight to purchasing what they wanted (i.e., a primary home).
“This way our money is being used first and foremost to generate additional income, which can cover the cost of the next thing we buy,” Sherman says.
Work with a real estate agent who knows the market.
Lauren Scott was hoping to buy a home in Southern California, but found herself priced out. Then it struck her: The Mediterranean climate in Italy is similar to that of Los Angeles, so she started house-hunting there. She ended up buying her first home (ever!) in Tuscany for less than she would have in California.
“The cost of a down payment in the U.S. covered my entire house and repairs in the region of Italy I bought in,” Scott says. Now, she vacations there a few months out of the year and rents it out the remainder of the time.
Scott recommends finding a local real estate agent who knows the area well. “In my case, my agent gave me feedback on which properties were also good for rentals,” says Scott, who runs the travel blog Freedom Not Fate. Her agent helped her steer clear of properties that were too rural; places tourists weren’t frequenting and would be tough to rent out on a regular basis.
Sipping wine and scrolling Zillow is indeed a soothing pastime, but it helps to have some nuggets of wisdom in your back pocket if that pastime results in you becoming a SHIFTer.