So you’re thinking about buying a second home? Congratulations!
Having a second home can mean providing your family with a special place to gather during summers, holidays and vacation time. This is also a big financial investment that can help you in the future.
But before you make your major decision, you should consider all important factors. Keep reading to learn the four things to evaluate when buying a second home.
Why Invest in a Second Home?
Before we dive into the factors you should consider in your buying process, let’s first review why people choose to invest in a second home.
Choosing a vacation home in a solid housing market and beautiful area can bring you many benefits. One of the main perks of a second home is that if you invest well, it should gain value over time. You also might choose to rent it out while you aren’t using it, or perhaps full time, which gives you the opportunity for additional profit.
Another more sentimental value that a second home brings is the chance for new memories. While families grow or expand, a vacation home allows you all to gather and celebrate holidays or just enjoy time together.
Finally, a second home might end up being the place where you choose to retire. Especially if your home is in a better tax bracket and in warmer weather, you might be planning to use this for future living.
If buying a second house is affordable and works with your financial goals, this can be a great investment. It’s important to take the decision seriously and ensure you are taking on a second home for sound reasons that fit into your goals.
1. Understanding Vacation Homes vs. Rental Properties
It’s important to understand the choice between keeping your home as a personal residence vs. choosing to rent it out. In terms of taxes, the interest on your second mortgage can be tax-deductible if you aren’t renting.
But if you do choose to rent your home and collect a profit, you will not receive the same tax benefits. This means you won’t be able to deduct the entire mortgage. But you will be able to deduct other expenses that relate to keeping up with the property while tenants occupy it.
This also means you’re taking on the role and responsibilities of being a landlord. So if you receive a call about a leaky faucet or any other home issues, you could end up with some extra expenses.
If you do your calculations and estimate maintenance costs, this could still be a worthy investment for you. You also have the option to hire a management company to assist you if you have the funds for this as well.
2. Consider a Larger Down Payment
If you’re able to afford it, making a large down payment on your second home can make a big difference.
Due to the loan-to-value ratio, this will mean that you’re borrowing a smaller percentage of the property value. Including 20 percent of the value as a down payment would be in your best interest.
Depending on the home you’re trying to buy, it might be more difficult to get a loan for your second house with a low interest rate. This is because banks tend to be more conservative with these loans than for your first house. So you may need to show high income and a strong credit score to quality.
It may take some time to get the financing you’re seeking. But with some preparation and advice from a financial adviser, you can make an informed decision and strive for the vacation home of your dreams.
3. Find the Right Location
When looking to buy a property that will continue to gain value, the location should be a huge deciding factor. This is also important for you to truly enjoy your vacation home for the next few years or decades.
It might be best to connect with a real estate agent in the location of the potential homes you’re looking at buying. They will be able to help you understand the history of the area and any plans for the future. This can give you an expectation for the value of the home in the future.
A real estate agent may also know about future zoning in the area. This will also help you understand if the property’s value will be affected.
For your own interest, consider factors like neighborhood attractions, restaurants, bars, etc. that you will want to enjoy. Also, think about the noise level and safety in the neighborhood, especially if you have a family with children.
4. Prepare Your Finances for Additional Costs
Preparing your finances is a crucial step in making your decision. It’s important to consider whether or not your current income is stable enough to sustain another house. You will also need a good cash reserve.
It’s also important to keep in mind the other expenses that come with any home, like maintenance fees, property taxes, repairs, etc. If you do plan for your second home to be a rental property, make sure you do calculations about the potential gains vs. costs.
Finally, if you plan to buy your second home to flip it, make sure you consider the translation costs. It can take time to sell a home, so it makes a better long-term investment than a short-term one.
How to Decide on Buying a Second Home
When buying a second home, you want to consider all the important factors that will go into your decision. With this being a big investment, you want to understand the real estate market, the potential value of the home, and your future plans for its use.
Once you sort through every detail and find the vacation home of your dreams, you’ll be able to feel secure in your decision.
Contact us today to learn more about how we can help you make your real estate goals a reality!