How to Buy a Second Home
- Jun. 5, 2014
- Rebecca Singer
- Personal Finance
A second home can be a great way gain additional income, increase your borrowing ability and to generate long-term wealth, but it's not always as easy as buying your first home. Since second homes are often investment properties, rather than simply a residence for your family, buyers should use extra caution when purchasing a second home.
As the housing market recovers, buyers can still find incredible deals—especially if you plan on renting your new home or condo. However, before you take on the financial burden of a second home, make sure you consider a few things.
Make a Safe Purchase
Many buyers get into trouble by assuming they'll be able to easily rent or sell a second home if it becomes a burden, which is not always the case. Before you buy a second home, you need to ensure that you can afford a second mortgage even if you can't count on that home as an additional income stream. That means you have to do everything you did when you bought your first home: calculate your monthly expenses and determine how much a second home will cost each month. First, get pre-approved for a home loan to know how much you can afford, and then consider property taxes, insurance, utilities and maintenance costs to ensure you can truly afford a second home.
Then, think about how you plan to use the house.
After the housing crash, most investors have moved away from flipping homes—and for good reason. Owning a home for long-term wealth generation or for rental income is a much safer bet for investors, but you need to know exactly what you'll be doing with a house before you commit to a purchase.
- Simply owning a second home is an incredible way to build wealth. Taking on a second mortgage can be an obvious burden, but building equity in two homes is a great way to set yourself towards financial security.
- Purchasing a home to rent can secure recurring, dependable income—but it takes careful planning to ensure a successful investment. Before you buy, do a few months of research to identify areas with low rental vacancies, moderate rents and affordable homes. Start by looking at growing metro areas and college towns for safer rental properties.
There are a few best practices when buying a vacation home. Unless you plan to regularly spend an extended vacation at a specific spot, it's probably not worth your money to come home from vacation and immediately buy a house in paradise. Like any home purchase, you need to do research before you buy a property. It's natural to fall in love with a vacation spot, but make sure you do your due diligence before you commit to a vacation property.
Look at things like travel time, regional issues (like civil unrest), and family appeal before you commit to a vacation property. You should also think about what you're going to do with the house when you're not vacationing. Are you going to rent the house to cover your taxes, insurance and upkeep? Then you may want to consider a management company or agent to assist you.
Owning a second home—whether it's a vacation home or an investment property—can offer significant tax advantages*. Deductions for additional mortgage interest, maintenance costs and property taxes can make a second home a much more attractive option.
If you're thinking about buying a second home, reach out to us today.
*Consult your tax advisor