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If you’ve been thinking about buying a second home, you’ll want to consider the full financial impact versus your income potential. Here are some key things to think about before you buy a second home.
Key considerations for buying a second home
You might consider buying a second home if you’re looking for a vacation destination or property to rent out for profit. Whatever your motivations, a second home might be a good investment, but there are drawbacks to keep in mind. These include:
Affordability
If you aren’t making an all-cash offer on your second home, you’re likely going to have a second mortgage. Look closely at your budget to determine if that extra monthly cost makes sense for your finances.
You’ll also need to budget for another homeowners insurance policy (and premiums), utility bills, property taxes and many of the other expenses of your primary home.
Don’t forget repair and maintenance costs. Even though you won’t spend as much time in your second home, you’ll still need to pay for upkeep. You’ll eventually need to replace the HVAC system, or the property might need a new roof.
The exterior will also need attention (think lawn mowing and snow removal), so if you aren’t there often, you’ll need to budget for a maintenance or management company to handle it.
Occupancy requirements
If you’re buying a second home, you might be thinking about making some money from it when you’re not using it. However, if you rent it out too often, your second home would be considered an investment property and could be subject to different tax and occupancy rules.
If your mortgage is backed by Fannie Mae or Freddie Mac, for example, it limits your leasing: The property must be “available primarily for borrower’s personal use and enjoyment” for more than half of the calendar year. The IRS has rules, too: If you rent your second home out for more than 14 days a year, you’ll need to report the rental income. If you sell the home at a profit, you might be liable for capital gains tax.
Location
Buying a second home in a beach resort community sounds like a great idea, but if you live really far from that town, getting there might be so much of a hassle that you don’t go there that much. Think about your lifestyle: Find a second home in a destination where you’ll really use it regularly.
How to buy a second home
Buying a second home is a lot like buying your first property. You’ll want to get preapproved for a loan and work with a real estate agent with experience in the area you’re buying in.
However, given that you’re likely buying this home as an investment or vacation home, you might be under less time pressure than you were when buying a home you planned to move to immediately. Use that to your advantage to be choosy and find the perfect home.
1. Get preapproved for a mortgage
When you were buying your first home, getting preapproved for a mortgage showed you were a serious buyer. Buying a second home is no different. A preapproval shows that you’ve already done some work to progress the transaction and that a lender is ready to help you make the purchase.
Shop around for rates, too. If you can shave off a few points from your interest rate, you can save thousands of dollars in the long run.
2. Find a real estate agent
The best way to buy a second home is to find a real estate agent who’s plugged into your desired location. The right agent can fill you in on price histories and how comparable sales have fared, as well as resale prospects.
“A good agent knows market trends,” says Nathan Zeder of The Jills Zeder Group with Coldwell Banker in Miami Beach and Coral Gables, Florida, including “how long homes have been on the market; if there are homes not currently on the market that might be available; why one side of the street could be worth 5 percent more than the other; if the direction of the backyard gets better sun; and how close the schools, restaurants, city centers, airports, country clubs and marinas are.”
Putting all of that together, Zeder says, “allows the buyer to make the best decision, not only about the home but about the location they are choosing in their new community.”
When you’re interviewing potential agents, Zeder recommends asking questions about how long the agent has lived and worked in the area and how involved they are in the community.
3. Go house-hunting
Just as you compared different neighborhoods and options with your first home, be open to touring various properties for your second home to see what fits your needs best. Research local property tax rates, and try to get a sense of the area’s housing market. Is it trending upward, a sign that your second home could also increase in value?
4. Make an offer
Once you find the perfect property, it’s time to buy. If you can make a sizable down payment and still leave plenty of cash reserves, go for it — a bigger commitment on the front end can pay off in the big picture and reduce your overall debt burden.
Keep in mind that getting second home insurance may be more challenging than for a primary residence. If you’re considering a second home on the beach, for instance, you’ll need flood insurance. The cost of flood insurance has increased exponentially in some coastal communities. Discuss these expenses with your agent and make sure your budget lines up.
Second homes vs. investment properties
Second homes and investment properties aren’t the same thing. If you’re borrowing money to get the home, be honest with your lender about your plans for its use. That’s because lenders have different down payment requirements, credit and underwriting standards and interest rates for these two property types.
In addition to securing a loan, understanding what distinguishes a second home from an investment property is important when you file your taxes. If you use it as a true residence — rather than renting it out — you could get a deduction for mortgage interest and property taxes, just as you do with your primary residence.
Property taxes you pay on your second home are also deductible, and different tax rules apply for second homes deemed investment properties rather than vacation homes, too.
Bottom line on buying a second home
Buying a second home means you always have a place to escape to, but being a second homeowner comes with some harsh realities: more expenses, more maintenance worries and more potential tax stresses. If you plan to obtain a second home mortgage, get your finances lined up in advance and partner with the right real estate agent who has experience in the area you’re hoping to buy your second home.
