How to Buy a Second Home
More Americans with the means are opting to buy a second home. In fact, sales of second homes accounted for more than 1/3 of all property transactions in last year. Many people decide to buy a second home as a place to escape on the weekends or in summertime, and they rent it out the rest of the year.
Top 7 Considerations for Buying a 2nd Home This Year
However, before you take the plunge and buy another home, you will want to consider the seven following things:
#1 How Much Will It Cost?
Naturally, there is much more to owning a second home than the cost of the home. Even if it is a small vacation home, it still needs to be carefully budgeted out to pay the mortgage, taxes, insurance, maintenance and utilities. Many of those expenses may run higher than you think too.
Some experts recommend budgeting 1% of the purchase price of the home every year for maintenance expenses. So, if your second home was $250,000, put aside $2500 every year for unexpected costs.
Do not forget to add in insurance costs, too. Insuring a second home costs 20% more or so than your first home. They are viewed as higher risks because you do not live their all the time.
#2 Can You Afford It?
Buying a second home comes down to money. You should not buy another home unless you have excellent finances and can really afford it. For example, you should only buy another home if you are mostly free of debt, are saving for retirement and have plenty of equity in your first home. Rates on second home loans remain attractive.
Generally, experts recommend that you should be able to pay mortgages on both homes and all of your debts using a maximum of 36% of your total monthly income. If you cannot do that, you probably are risking too much by buying a second home.
#3 Why Are You Buying It?
Some people like to tell themselves that buying a vacation home with 'save' them money because you will not need to pay for a hotel and restaurant meals when you vacation. This is illogical. You will spend hundreds of thousands of dollars on another home, not to mention all of the maintenance. That amount of money can pay for your hotel and meals many times over for many years.
A good way to look at it is that it is an investment that you can sell later to provide you with more money for retirement. Make sure that long term real estate trends in the area you are buying are positive.
#4 How Will You Use It?
Is the home going to be just for you, or will you rent it out to pay for maintenance and utilities? Think about why you are thinking about buying it and how it will be used.
If you are going to use it just for your family, then you can buy what you want. But if you want to rent it out, you will have to factor in what potential renters will want in the property. You might want a second home far from civilization, but many renters may find it too far of a commute.
#5 Is It the Right Property to Rent?
As you are looking for another home that you can rent out part of the time, you want to be sure that you can get enough rent for the place. You need to be able to cover your mortgage and all associated expenses.
Also get an idea how many weeks per year you can really rent it out. On average, people rent out second homes for 15 weeks per year. If you count on more than that, you could be disappointed.
#6 Do You Need Property Management?
Maintaining a second home takes work, as does getting it rented. Do you want to do all of that or do you want to hire a company to do it for you? You should expect to pay 20-30% of your rental income for property management.
If you do not live far from the property, you may consider managing it yourself. But if you are far away, you will probably want to hire someone to do it for you. And you have to factor in management costs to determine if owning the second home makes financial sense.
#7 Is the Home in a High-Risk Area?
If you are buying a second home near the beach, you want to know if that area is prone to flooding or severe storms. If it is, it could be very expensive to get insurance for it. Also, if it is in such an area, you will want to budget more for maintenance.
The Bottom Line
Buying a second home can give you a great deal of pleasure and satisfaction, not to mention extra income. But if you are not careful, it can turn into a money pit. So, review the above considerations and then decide if you are ready for your second home.
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