Answer These Questions Before You Buy a Second Home

People across the nation have decided to join the movement in owning a second property. According to a survey by the National Association of Realtors in 2017, second property sales were up 30% from 2016.

Are you thinking about joining this second-home movement?  Before deciding on purchasing a vacation home or rental property, here are 8 questions to ask prior to making the final decision.
1. How much will it cost?

In addition to the actual price of the home, there are many more expenses involved with owning a home. These include an additional mortgage, property taxes, insurance, and maintenance fees. Your maintenance fees will most likely be higher than you would expect since you aren’t at the home every day, and the small problems may not be fixed until they become big problems. Also, since you won’t be there every day, insurance prices will be higher since they are seen as a more high risk investment than primary homes. It is also good to know that if you plan on renting your home, you will be hit with more fees for medical and liability coverage.

2. Can you afford a second home?

Before buying a second home, it’s important to consider all aspects of your finances. How much debt do you have? Are you on track for retirement savings? Do you have enough money for a 20% down payment?

Mortgage lenders will be looking closely at your debt-to-income ratio before approving you for a mortgage on a second home. In terms of finances, you should be able to pay any mortgage payments and your debt without spending more than 36% of your gross monthly income. If this would be a financial struggle for you, you might want to hold off on purchasing a second property.
3. Why are you buying?

If you plan on buying a vacation home as a way to save money for when you travel, you might want to rethink your purchase. However, if you view the home as an investment property, such as a place to retire or sell, then this might be more beneficial to you. Be sure to research market value for the past ten years to understand how the market works for that location, and if it would be a potentially profitable purchase.

4. What’s the purpose of the home?

Is this second property going to be for personal enjoyment, or as a rental property? If you are looking for a second home for your own use, you can buy a home anywhere. If you are considering a rental property, it’s all about location. The purpose of a second property is also important in terms of tax rules, as there are different rules for personal and rental properties.

5. Is the property right for rental?

If you want to use it as a rental property, you first have to decide how often and how long the rental season will be. Next, research local rental markets for pricing on nightly or weekly usage. Finally, consider the location and if it is close to attractions, such as the beach. If you want to make it a great rental property, make sure to add special amenities to make it outshine the competition!

6. Do you need a property manager?

If you’ve made the decision that it will be used a rental property, who is going to do all the work (advertising, cleaning, deposits, maintenance, etc)? You can do this yourself, or hire a property manager, which will cost you about 30% of your rental income.

7. Is the property in a high risk area?

Be mindful of areas that have a high risk of natural disasters, such as hurricanes or floods. Homes on the ocean tend to have higher rent need and prices, but also come with an increased risk of being damaged.

8. Is this an impulse buy or rational decision?

Buying a second home is a luxury purchase, which means you can have time to research and save until you find a property you really love.

Buying a second home can be a great investment provided that the financials all make sense. But before you commit to anything, make sure you take the time to assess the purchase from every angle, understanding all of the costs associated with the purchase, ensuring they fit into your budget, and being aware of how the day to day upkeep and operations of the home are going to work.