Find out by getting a handle on the expenses, big and small, that come with second-home ownership
 

By Amy Gunderson
Golf Digest
June 2006

 

It's a scenario familiar to anyone who plays the game: You return from a golf vacation and immediately start thinking how great it would be to go back to the same wonderful place a few times a year--or even a few times a month.

Is this the year you do something about it? Are you ready to buy your very own golf course getaway? We've got what you need to know about financing the purchase, securing insurance, becoming a landlord, and dealing with taxes. We'll also help you navigate the expenses, many of them unanticipated, that accompany ownership in a first-rate golf community. Our interactive work sheet will help you estimate how much golf home you can afford.

How will you pay for your property? At the toniest clubs, management seems almost unfamiliar with the concept of financing. "Our experience is that owners pay cash for their homes," says Phil Edlund, president of Las Campanas, a community in Santa Fe, N.M., with two Jack Nicklaus-designed courses and 1.5-acre home sites starting at $250,000. But most second-home buyers finance at least part of the purchase. As long as you don't plan on earning some extra cash by renting out the property, there isn't much difference between mortgage rates on a loan for a primary or secondary residence. Mortgage lenders eye investment properties as more risky ventures, so loan rates are typically three-eighths to half a percentage point higher than a standard mortgage.

A home-equity loan is the more traditional way to use the current value of your primary home. The good news is that interest on home-equity loans is deductible on loan amounts up to $100,000. However, home-equity loans today carry interest rates more than 1.5 percentage points higher than a typical 30-year mortgage.

In addition to homes and condos, many golf communities are selling fractional ownerships. Seven Canyons in Sedona, Ariz., has one-tenth shares of 2,500-square-foot, three-bedroom houses for $425,000, and at Pronghorn in Bend, Ore., you can buy one-sixth of a two-bedroom home (plus den) for $254,500. Big lenders have so far steered away from financing these properties, partly because there is a sense that fractionals carry higher risk. Although fractionals are deeded ownership, a lender can't go in and repossess a tenth of a house. Instead a developer might offer its own in-house financing or refer buyers to a smaller lender specializing in this emerging market, typically at slightly higher rates.

Are you landlord material?

Working out the financing for a vacation home is only part of the challenge. When tax time rolls around there are a host of things to keep in mind, especially if you are a landlord. The key word is "usage." As with your primary home, you can deduct mortgage interest and property taxes on one vacation home regardless of whether you rent out the property or use it only for yourself. (You can deduct property taxes on more than one vacation home, but not mortgage interest.) And get this: If you rent out the property for 14 days or less each year, Uncle Sam gives you a break and you don't even have to declare that rental income.

Now here's where it gets tricky. Say you rent out the house more than 14 days a year and you also use the house yourself for more than 14 days in a year or 10 percent of the days it was rented out. In this case you have to report the rental income, but you can also take a number of deductions. "Any expenses associated with investment property would be deductible," says Mark Luscombe, principal tax analyst at CCH, a tax-information publisher. "Not only can you deduct the mortgage interest and real estate taxes as you do with a primary home, but also a portion of the homeowners-association fees and money spent on decorating the house and making repairs."

Let's say you are more landlord than resident. You rent out the house for more than 14 days but use it yourself for fewer than 14 days or 10 percent of the days the property was rented out. In that case you get all of those tax deductions and another benefit: You may deduct any losses on the house, if the expense of renting out the property exceeds the rental income.

Gordon Johnson of Lafayette, Calif., falls into this last category. He and his wife, Diane, have a two-bedroom house overlooking the ninth hole of the Jack Nicklaus private course at PGA West. They rent it out for three months of the year, earning about $16,000. But their expenses come to about $37,000 a year. By limiting their time in the unit to fewer than 10 percent of its rented days, they're able to consider themselves landlords--and deduct an annual loss of roughly $21,000 a year. If they want to spend more time at PGA West, they'll rent from friends rather than stay at their own place. True, it's bit of a hassle just to get the tax break. But Johnson isn't complaining. He estimates the house has doubled in value since he bought it three years ago.

Like the sound of that? Before you buy any income property, spend some time investigating the market. In some areas the rental season is limited. Renters flock to the Southern California desert from November through April, but in the summer it can be nearly vacant. Georgia's Ford Plantation, by contrast, attracts visitors year-round. Regardless of where you purchase, lenders generally take into account only about 75 percent of the estimated rental income when evaluating your application.

Beyond making mortgage payments, you might see a larger-than-expected chunk of your budget going toward insuring your second home. Insurance companies have always been slightly wary of second homes, partly when they are empty for a good portion of the year. But the good news is that houses in gated, secure golf communities eliminate at least part of the risk in the eyes of insurers. (To see average insurance costs by state, visit the Insurance Information Institute's website, iii.org.)

Fee options

Ownership costs go well past taking care of that roof over your head. There's your membership, for one. Some communities require owners to purchase a full golf membership, but others have lower-priced options that give you access to golf with a few limitations. A golf membership at Las Campanas in Sante Fe, valued at $90,000, is priced into home lots. If a buyer isn't interested, the price of the land is reduced by $30,000 in favor of a social membership. Lake Las Vegas Resort has tiered levels of golf and social membership ranging from a $21,000 initiation fee with $235 monthly dues all the way up to a $175,000 membership that carries monthly fees of $858.

When John Dee bought his 3,000-square-foot lakefront home in Florida's Bonita Bay four years ago, he opted for an $11,000 social membership over the $130,000 full golf membership. Instead of yearly fees of $8,000, he pays just $600. He can play as much as he wants April 15 through Dec. 31, but for the rest of the year he either plays as a guest of other members or hits other area courses. Considering how much that full membership fee would generate in an account earning 5 percent a year, he's happy with the tradeoff. "It would take a lot of golf to offset that," says Dee.

Besides golf fees there are homeowners-association dues, covering maintenance and insurance on common areas and the cost of keeping the community looking good. These vary from more than $400 a month in some Lake Las Vegas communities down to just $100 a month at the Club at Spanish Peaks in Big Sky, Mont. Some neighborhoods face additional charges if they have extra landscaping or their own entrance.

These fees don't disappear with fractional ownership. PGA West's new fractional development offers one-ninth slices of ownership with a minimum of three weeks' usage during the prime season between October and April for $259,000. Though owners may use the property for less than a month each year, homeowners-association fees total $1,100 a month.

Don't forget the cost of maintaining the house itself, something many part-time residents hand off to property managers. At Lake Las Vegas, weekly house checks run $125 a week, yard maintenance goes for $150 a month, and stocking your fridge costs $30 an hour. If you're hiring an agency to handle renting the property, too, expect it to take a 30 percent cut of the rent.

Looking at all those costs, it might be easy to decide the whole thing is too expensive. But don't forget that original appeal of owning prime golf real estate. When Harry Bassford bought a three-bedroom house at Bay Hill Club in Orlando in 1999, he admits the $235,000 price tag was more than he planned on spending. Yet he has seen comparable homes sell for $700,000 today. Not only does the first hole of the course make up his back yard, but so do some of the legends of the game. "Arnold Palmer is a member, and he's there just about every day. I played golf with him once," says Bassford. "I don't think anyone can top that."

Amy Gunderson is a freelance writer specializing in real estate and investing.