Buying a Second Home

 Buying a Second Home

BY PEDRO BENITEZ-CRESPO

For many, the dream of owning a second home is more than just a passing fancy; it’s a tangible goal that can provide a sense of security, a source of potential income, and a haven for family getaways. Buying a second home is a significant financial and lifestyle decision, and it’s important to approach it with careful consideration. Although it can be a complex task, with meticulous planning and the right information, it’s definitely achievable.

During the regional tour that took place in the city of La Paz, this last October, Gregorio Sánchez, Corporate Business Director of BIM (Banco Inmobiliario Mexicano for its acronym in Spanish) – the Mexican Real Estate Bank, spoke about their focus in the Baja California peninsula, with a strong emphasis in both, the cities of Los Cabos and La Paz.

“We have over one billion pesos invested in construction loans (bridge loans) and plan on increasing this number year over year”, said Mr. Sánchez. Today they manage more than 60 billion pesos in trusts and have over ten thousand savers – with around eight billion pesos.

Amongst several financial services, the bank offers residential financing to foreigners through trusts in restricted areas with a ticket between US$200,000 dollars and US$800,000 dollars; a product targeted for customers without a credit history, without a temporary residence, while also allowing pre-sale purchases! BIM is also active in commercial financings – such as commercial premises, offices, warehouses and industrial warehouses.

BIM also encourages their customers to structure deals through fractional real estate investment ownership trusts, where apartments, houses and residences are commercialized through the sale of fractions with trust rights. How does this work? Simple. The buyers or investors own a fraction of the property and its use is regulated through a trust. So as an investor, one can acquire a high-value asset, with owner’s capital gains, which can later be sold, assigned, donated or inherited, with cost efficiency, dividing the purchase price and maintenance expenses, avoiding co-ownership and its legal inconveniences, and serving as a source of passive income.

Developers also benefit from the virtuous cycle promoted by this and other financial institutions, working hand-in-hand through BIM’s products, where they sell their projects faster and it also gives them access to new markets (domestic and foreign) in order to have a faster absorption rate.

As of now, BIM does not offer individual credit as a mortgage, yet they promote HIR Casa – a real estate self-financing product, also owned by the bank’s group, targeted to people who are unattended and/or poorly served by the traditional banking system. 

In the near future, BIM seeks to enter the individual mortgage market, complementing what their brother HIR Casa does today. 

During the regional tour, Mr. Gregorio Sánchez also spoke about the importance of doing our own due diligence and the current real estate situation in the country. He suggested that it is of the essence to evaluate our financial situation before we even start looking for a second home, taking a close look at our finances by calculating our monthly income, expenses, and existing debt obligations, as well as determining how much we can comfortably allocate to a second mortgage without compromising our financial security.

Most lenders require a down payment of at least 20%. Since the down payment can significantly affect our interest rate and overall loan terms, one needs to be prepared to save a substantial amount. In the industry, it is expected for larger down payments to occur for a second home compared to your primary residence.

Regarding interest rates for second mortgages, they are often slightly higher than those for primary residences. The exact rate you qualify for depends on your credit score, down payment, and lender policies. So it is encouraged to shop around and compare rates from different lenders to find the best deal. It is highly advised to reach out and speak to several lenders to discuss your financing options and get pre-qualified. Pre-qualification gives you an estimate of how much you can borrow.

Let’s remember that death and taxes are two things one can never avoid in this world, so it is important to consult with a tax advisor to understand the tax implications of owning a second home. Tax deductions and benefits may vary depending on how you use the property.

Plan for additional costs: remember that owning a second home comes with added costs, including property taxes, insurance, maintenance, and, if applicable, homeowners’ association (HOA) fees.

Last but not least, legal considerations and closing processes: Be aware of local regulations and zoning laws that might impact your second home. Some areas have restrictions on short-term rentals, which could affect your plans if you intend to rent out the property.

Once you’ve secured financing, you’ll go through the standard closing process, which includes inspections, appraisals, and signing the mortgage documents. 

Buying a second home requires financial diligence, so it is essential to work closely with your lender, real estate agent, and other professionals to ensure a smooth and successful purchase. Remember that a second home can be both a valuable asset and a source of enjoyment, so make sure it aligns with your financial goals and lifestyle. This endeavor offers you both a retreat and a potential income source. And even though it is a significant commitment, let’s just remember that, as Steve Bolton once said, “the only bad time to buy property is later.”