Q & A With Americas Real Estate Professor: Second Homes

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By Leonard Baron

Second Homes

Q. My wife and I are getting closer to retirement and thinking about taking a mortgage out on our home and investing the money into a vacation home to diversity our investments. Alex Z., Las Vegas, NV

A. There are a couple of issues I would suggest as caution for you to consider, but above all, you should talk to a licensed financial advisor before you do anything. First, you should really think through whether taking out a mortgage on a paid-off property is a good idea. If you are getting close to retirement, do you really want to add on a monthly payment? If you could buy a property with cash, that would be better than borrowing for one. However, it’s probably not a good idea overall for you to buy a vacation home.

Since you note “investing” the money into a vacation home above, I also want to caution you that second homes are not investments, they’re liabilities. Even if you had and could pay cash, you are taking money from your other investments that probably earn interest or dividends, and using it to buy a property that returns no cash flow to you. And doing it as a part time “vacation rental” does not solve the problem either as they generally have very poor cash flow. If you want to own real estate as an investment, a better bet would be to buy a normal cash flow positive rental property so you’ll have some incoming money to spend, or save, for a comfortable retirement.

PB Pipes and Disclosures

Q. I bought a foreclosure condominium unit a few months ago and just had a contractor start a bathroom renovation. He alerted me to the fact that the water supply pipes are polybutylene pipes (PB). He said PB pipes can be a big problem. What are these PB pipes and shouldn’t the bank or my home inspector let me know. Carly S., Los Angeles, CA

A. Between 1978 and 1995, 6 to 10 million residential units in the U.S. were built with PB pipes. They’re flexible rubber type pipes and made building condos, townhomes and single family homes much less expensive. However, what people learned in the following years is that PB pipes can corrode and leak over time, especially right off the water heater past a few feet of copper pipe.

In single family homes you can have them replaced to cure the risk of an expensive leak or flood from a damaged pipe. It’s probably going to cost you $5,000 to $10,000 depending on the water fixtures and configuration of the property. In condominiums and townhomes, you might be able to replace your PB pipes, but that doesn’t mean the neighbors do the same, so you still have the risk issue of a burst pipe. Any leak might be covered by your interior condominium policy, but it might, unfortunately, be excluded from coverage – check with your insurer.

In California, and many states, a Transfer Disclosure Statement (TDS) is not required by a bank that foreclosed because they’ve never lived in the house and probably would not know. It’s also unlikely in a condominium that there would be any exposed pipes that an inspector would see to make that determination. So unless you told him to tear out the wall to look, the inspector would not know. Your best bet is probably to discuss the issue with the HOA and determine their desire to consider replacing of all the interior plumbing supply lines.

Leonard Baron is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt!

Email your questions to: Leonard@ProfessorBaron.com


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