Are you thinking of finally getting the vacation getaway you’ve always dreamed about? Or maybe you are considering becoming a landlord – given how hot the market is, owning a second property can be a smart investment. There are many reasons to consider buying a second home. And while buying a second home is exciting no matter the reason, there are financial impacts – both obvious and less obvious – that you should think through before committing.
1. A mortgage on a second home will be different than on your first home. Be prepared for more scrutiny and higher expectations when it comes to a down payment and securing a mortgage. Because this will be a second home and you will be carrying two mortgages, lenders want to minimize their own risk. Expect a higher down payment, and potentially more stringent qualification terms for a mortgage on a second home. Plan for at least a 20 percent down payment and for a higher interest rate on your loan (loan requirements are subject to change based on a variety of factors).
2. Make sure you understand the tax implications. Working closely with your tax professional from the very start is key to understanding your potential tax burden with a second home. Look beyond the property taxes for your second home, especially if you’ll be renting it out more than 15 days a year. You will need to report income tax to the IRS. But you may be able to deduct operating expense to maintain your rental, such as repairs and improvements, and may be able to apply certain tax deductions if you only live there for two weeks per year. Be sure to consult with a qualified tax consultant. By doing your research in advance of your home search, you’ll save a lot of time and energy – and possibly frustration – later.
3. Research home insurance before you buy. If your second home is on a beach or has other geographical considerations, you may need to pay more for home insurance than you do for your primary residence. And if it’s far away from your primary residence, insurance companies can worry that the second home won’t be properly maintained. Do your research in advance.
4. Budget for maintenance and repairs. A good rule of thumb when it comes to repairs is to plan for 1 percent of the purchase price of your home. A $400,000 second home will take about $4,000 per year. If it’s a vacation home, repairs and maintenance might not need to happen in a timely manner, depending on what needs fixed. But if it’s a rental, you’ll need to budget some additional time in your schedule to fulfill the role of landlord. And even though nobody likes to think of it, factor in budget for tenants or guests who leave your home in a less than desirable condition.
5. Be sure you are buying the right second home for you. Just like you probably did for your first home, make a list of what’s important to you. Your criteria will likely be very different if it is strictly a rental property. But if it’s going to be a home you start as a rental and eventually spend your retirement years in, that factor adds in a different set of considerations. Once you have your list, consult with a trusted mortgage lender to help you figure out what properties you can and can’t afford.
By evaluating these five items, you can determine if buying a second home is right for you – and make sure you’re fully prepared when you do decide to enlist a real estate professional.