For most people, buying a home is one of the most significant investments they can make. Buying a second home? That's an even bigger responsibility.
Purchasing a second home is a huge upgrade, whether you're claiming a spot where you can take a breather from the bustling city or dipping your toes into real estate investment. And while you've already experienced the home-buying process before, there are certain aspects unique to a second home purchase that you should consider.
This article shares six things to consider when buying home #2 to help you make well-informed decisions.
Purpose
The why is one of the most essential things to consider when buying a second home.
Do you want to use it to generate passive income? With the rise of rental platforms and home-sharing trends, buying a second home can generate extra income, especially if you choose a property located in vacation places–think mountain resorts, beaches, and national parks. At the same time, purchasing a second home allows you to diversify your assets beyond the stock market, insurance plans, and bonds.
Or do you want to buy a second home simply as a place where you can rest and have quality time with your family? Buying a second home can give you a place to unwind and escape your busy and stressful life.
A second home can also be a valuable asset you can pass on to your children or grandchildren or use as a retirement home. Regardless of the reason, how you use the second property can have several implications on other factors, including taxes.
Type Of Property
When looking for a second home, you have various property types to choose from. Generally, the property type you choose will depend on your goals and purpose for buying a second home.
Common property types for a second home includes single-family homes, condominium, semi-detached houses, apartments, row houses, mobile homes, and so much more. Once you decide on a suitable property type, check floor plans and try virtual home tours to experience the inside of a property without leaving your home.
Location
Location will always be the most critical factor in terms of real estate investment. Whether you're buying a second home as an investment property or for personal leisure, you need to choose one in the right location for your needs.
If you're buying a second home to use as a rental property, a good location with access to entertainment avenues and numerous facilities can increase demand and boost its value. This can provide a positive return on investment. That said, if you're buying another home for retirement or vacation, you want a property in a peaceful, quiet area.
Your Finances
Another critical thing to consider before buying a second home is whether or not your finances can handle it.
While it may seem obvious, you want to ask yourself if you can genuinely afford another home. Unless you have a large amount of cash stashed somewhere, you'll need to take out a loan to finance the purchase.
Ideally, you want to consider buying a second home if you have already paid off your first mortgage or at least made consistent and timely payments for years. Moving forward, there are new financial considerations your need to pay attention to. You need to take time to understand the requirements so you're better prepared for the process when submitting a second mortgage application.
Generally, you probably know the strict credit requirements when taking out a mortgage. However, it's even stricter when taking out another one.
For one, a second mortgage often has higher interest rates than first mortgages–about a quarter to half a point higher. If you're still paying for your first mortgage, you must prove to the lender that you can cover both mortgages. Aside from the interest, the down payment for a second mortgage is also higher. It typically ranges from 10%-20%, depending on the type of property you're eyeing.
Also, remember that your second home needs to be protected. As such, you also want to factor in homeowners’ insurance and get a quote from your insurer.
Taxes
Determining the tax implications of a second property is another challenge. Generally, which tax and how much you pay will vary, depending on the type of property you want and its purpose.
If you're keeping it as one of two residences, then the interest on your second mortgage is often tax deductible. However, if you're renting it out, this means you'll generate rental income throughout the year. That income will be taxable, and you won't be eligible to deduct all your mortgage interest on your second home.
That said, you may still deduct expenses related to the upkeep of the second home during the days when tenants occupy it. So, one of the most important things you need to do as a landlord is to maintain detailed and accurate records of your annual expenses and income to correctly report the information on your tax return.
Maintenance
For most people, maintaining their homes is already a chore. Keeping a second house means double the effort. As such, you want to consider how and who will maintain your second property.
If it's located near your primary home, it's easy to provide regular upkeep and maintenance of your second home - if you have the time and are willing to do those tasks. However, if it's located far away from your primary home, you need to consider how it’ll be cared for if you're not staying there or keep it in presentable condition for tenants. This is particularly important if the house is in an area prone to severe weather.
In this case, consider hiring a caretaker for your second home. If you're renting it out, look for a property manager to handle the general upkeep and logistics, ensuring that your property is well-cared for.
Takeaway
As you can see, buying a second home is an exciting journey but comes with unique considerations. It can act as a vacation home, an investment, or both and will require thorough research and preparation to ensure success and maximum return on investment.
So, before you fully jump into buying a second home, take the above considerations to heart, guiding you throughout the process and helping you make the most sensible decisions.
