Are you ready to make your vacation destination your second home?
Maybe you've been traveling up to the same spot in the mountain year after year, or spending summers on the beach before returning to the cool Midwest for winter? Or maybe you're finally ready for that pied-a-terre you've been dreaming of in Europe. Whether you plan on spending a few days a month or a few months a year in it, there are a few things you need to know before you buy a second home.
Benefits of a Second Home
Second homes aren't only for the wealthy 1% of the United States. It's not uncommon to see middle-class and upper-middle-class families enjoying the benefits of a second home. Here are some of those benefits:
Buying a second home can be great for extended family gatherings in the summer or around the holidays. Nothing is better than going to a favorite family spot to reconnect with children and grandchildren. A vacation home provides that home-away-from-home feel, without needing to book properties months or even years in advance.
R and R
If rest and relaxation are important to get the creative juices flowing in your employment, a second home can prove to be a worthy investment of time and money. You can sit back and relax knowing there won't be any concierge to tip, check-in and check-out restrictions, or rules to restrict your favorite furry friend.
A Change of Pace
If you’re one of the thousands of people suffering from Seasonal Affective Disorder in the cloudier states, a second home may be a necessity for your health. Having both your primary residence and vacation home means you can experience the best of both worlds when you need it.
It may not be your first reason for purchasing a second home, but the decision to rent out your second home could end up paying for your vacation every year! Beyond that, you could even rent out your primary home during the time you spend at your second home and make enough money to cover your mortgage payments throughout the year.
There are caveats to owning a rental property as we will discuss later in this piece, but choosing to rent out your second and primary home can have some amazing benefits.
Affording a Second Home
One of the major barriers to owning a second home is the topic of affordability. You do need to have quite a stash of cash (your financial advisor may even say six months’ worth of both mortgage payments) to purchase a second home.
If you plan on borrowing money, you have a few options available to you.
You probably went this route with your first home, but one of your options for getting a second mortgage is to talk to your mortgage lender. While you won't be able to use loans like FHA or VA loans, you will be able to use most loans through Freddie Mac or Fannie Mae.
Expect your loans to have a higher interest rate (they often do for second houses) and a larger down payment (think 25% of the purchase price) requirement. A second home is considered an investment property, and banks view investors as riskier than your average homebuyer.
Your lender will also want to take a look at your debt-to-income ratio and make sure you’re financially secure enough to get a second mortgage.
Hard Money Lender
If getting a loan from a lender is difficult for the time being, but you plan to sell your first home or are expecting a large sum of money in the next five or so years, you may decide to work with a hard money lender.
While an option, hard money loans typically include balloon payments. You should never enter into a situation where you'll owe a balloon payment without first having a plan to pay it off, such as refinancing the house or paying it off completely before it's due.
Home Equity Line of Credit (HELOC)
If you have some equity in your primary residence, that may be your best option for purchasing your second home. HELOCs typically have higher interest rates than your first mortgage, but are easier to qualify for than a second mortgage would be because you have your first house as collateral.
What to Consider When Buying a Second Home
Buying a second home is not like buying your first. There are multiple payments, upkeep, and escape methods to consider. Here are some of the basics that you'll need to think about when buying a second home.
If you plan on renting out your second home for less than 15 days a year, it is not considered a rental property and you don't need to pay taxes on the income. If, though, you do decide to rent it out for longer than that, you will need to pay taxes on the income.
The good news is you have things like a mortgage interest deduction that you can write off if it is used as an investment property. If you’re not going to rent it out, you'll want to talk to your financial advisor about how much of the mortgage interest you can write off.
Property taxes are also something you'll want to consider. Based largely on the location you’re living in, the property taxes could take a significant portion of your budget each year. Make sure you take that into account before you purchase your second home. You don't want to pay for mortgage, upkeep, and high property taxes for a home you'll only enjoy for a few weeks out of the year.
Property insurance is also an expenditure that many forget about when buying a house. If you purchase a home on the beach, for example, you may need more insurance to counteract the effects of the hurricane season. Make sure you factor insurance into your monthly costs for a second house.
Property Management and Upkeep
Some people wonder if they can buy a second home if they rent out the first. The answer is yes, as long as you can afford the payments. Not every home is going to have the same ROI, and that needs to factor into your decision.
Remember, your second home, whether you rent it out or not, is going to have maintenance costs attached. You'll need someone to take care of the landscaping, run the water every once in a while, or vet and care for tenants if you’re renting it out. These costs vary from location to location (think: secluded mountain home = more travel time for maid), so make sure to talk to a real estate agent who is very familiar with the area and second homes to help you factor those costs into your budget.
Cut down on maintenance costs and property taxes by purchasing a condo or renting an apartment instead. These types of homes make it easy for you to enjoy things like a pool without worrying about the upkeep.
If you’re planning to buy a condo or apartment, though, beware: many places have rules in place that dictate how many days out of the year you must live there and whether or not you can rent it out on Airbnb.
Should I just stay in a hotel or Airbnb instead?
If you’re on the fence about buying a second home, ask yourself these questions:
- How often do I visit this location?
- Do I have the money to afford a second home and still have enough for emergencies?
- Am I up to the task of maintaining the property or paying someone else to do it?
- What if I don't like it or need to sell? How easily will I be able to sell the home?
Visit the area in the off-season to get a feel for the place as the locals do. Ask the locals questions about the area and weigh any pros or cons in advance.
If you’re getting a condo or apartment, you may want to consider trying it out for a few days first. Some places will let you stay in the condo for a small fee to make sure it really is worth buying.
In the end, it all comes down to the affordability and feasibility of buying a second home. Make sure you’re aware of all the implications that it could have on your budget, your time, and your energy. Talk to your financial advisor before making any big financial decisions like buying a house, and make sure you do your research before jumping into what seems like a great deal.
If you do decide to purchase a second home, good on you! We hope it turns out to be everything you hope for.
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