In many ways, second home purchases are similar to the primary home purchase. Realtors say putting 20 percent down or more is common for second homes to avoid the expense of mortgage insurance and given today’s tightened lending practices. “It’s possible to buy a true second home with 5 or 10 percent down, but it’s tricky,” says Ruth Krinke, RSPS (Resort & Second Home Property Specialist), associate broker with Steamboat Real Estate in Steamboat Springs, Colo.

When it comes to negotiating, second home sellers may be more flexible than their primary-home counterparts. “Second home sellers are often more flexible in price and terms of sale. They may want out because they are overextended or their lifestyle has changed,” Greenstein says.

To move the sale along, buyers can request special terms of the seller. For example, as an incentive, sellers might be willing to carry a second mortgage for three to five years, Traverso says. “Sometimes banks will accept 10 percent from the seller when the buyer puts down 10 percent. The seller may take on a burden to get the deal done when banks will only loan 80 percent of the value of the home.”

Consider these tips when investigating your financing options:

• For mortgage financing, use a local lender in the area you are buying, Traverso says, because its expertise and knowledge of the market can avoid problems later;
• Stricter guidelines are involved in qualifying for a mortgage for an investment property. Typically, borrowers pay a higher interest rate;
• If you do need the rental income to qualify for the loan, you may need a minimum of 25 percent down, Krinke says. Lenders tend to give credit for up to a 75 percent occupied rate;
• Other forms of financing include tapping into your primary home’s equity line of credit, known as HELOCs.

Step 4: Learn the tax ins and outs.

Savvy tax planning can make a difference in your return on the property. Tax implications for second homes can vary significantly based on your financial situation and whether or not you plan to rent out the property. Keep these in mind when figuring the impact on your taxes:

• Consider property taxes, utilities, homeowners association fees and other applicable expenses.
• Generally, the interest on the mortgage of your second home is tax deductible, and rental properties are subject to additional tax breaks. “If it’s an investment property, then the deductions come in an array of possibilities, including depreciation of the real estate itself and a separate, accelerated depreciation of personal property such as furnishings,” Krinke says. “Owners can use the property only for two weeks a year to get certain tax benefits on rentals,” Greenstein cautions.
• If you rent out the home for 15 days or more during the year, you have to report all rental receipts to the IRS as income, but you can also deduct operating expenses such as utilities, repairs, insurance and management fees against that income.
• Consider strategies for reducing or deferring capital gains upon the sale of the home. For example, the Internal Revenue Code Section 1031 tax-deferred exchange allows for the deferral of capital-gains tax by exchanging for “like kind” property allowing for taxes to be paid when a sale of a second or third property is ultimately realized. As a general rule, 1031s are used when you sell real estate held for investment purposes and not for the sale of your personal residence.
• Always consult with a tax professional or a specialist such as a national qualified intermediary for tax-deferred exchanges before getting too far into the second-home buying process.

Step 5: Research alternative ownership options.

In addition to single-family homes, townhomes and traditional condominiums, experts say to tread cautiously with alternative ownership forms of vacation homes such as fractional ownership, vacation clubs, time shares and condo hotels.

Resale values on certain types of cooperative-ownership properties may not hold up over time and selling these properties can be a burden. “Resale values on fractional ownership properties are usually higher than time shares because very few timeshares are actually deeded ownership,” Krinke says.

Financing is easiest around single-family homes, Krinke says. “Multifamily dwellings, townhomes and particularly condos, can be difficult to arrange financing for.”

Whether you’re looking for a home to spend your retirement days or an investment property to diversify your portfolio, make sure you do your homework and work with the right experts.