5 Factors To Consider When Buying A Second Home
The biggest investment
most people ever make is their personal residence. Buying a home is a rite of
financial passage. It means breaking the bonds of paying rent to someone else
and paying yourself by building equity of your own.
But what about buying a second home—say, a vacation home? Is it a good investment? As with any financial decision, it depends on your personal preferences, long-term goals and current financial situation.
Here are five
things to consider before buying a second home:
#1: Location
“Location, location, location” is always a key factor when it
comes to real estate. You can’t physically move the house to a better location
if you choose poorly!
If you’re buying a property where you intend to vacation each
year, you’ll want to be sure that the location is one you’ll enjoy for
years—not just a few seasons. And make sure that you’ve considered everything
about the location you choose.
Do you like the peace and quiet of a mountain cabin, even if you
happen to get snowed in extra days because of an unexpected winter storm? Or do
you prefer a beach condo, even if unruly Spring Break teenagers occupy the unit
next to yours the week you decide to take your family? Or maybe a resort
property in Nicaragua fits your style—until you realize that you can’t find
needed supplies or competent English-speaking help to keep the property up and
running because of its remote location?
You’ll also want to understand the history and planned future
for the specific property and general area to determine a reasonable estimate
of the property’s appreciation potential. Connect with a local real estate
agent to understand these factors and more, including potential zoning
proposals that could negatively or positively affect the property’s future
value.
Vacation homes tend to be located in desirable places where
people want to visit. These areas often experience market appreciation simply because
of their desirability. But you have to be careful. Real estate values can vary
widely even in these seemingly bubble-insulated locations. A season of
devastating hurricanes hitting the same beach town can do so much damage that
the local economy will take a decade or longer to recover.
Your choices are nearly limitless. A waterfront cottage on the
bay. A secluded lake property surrounded by miles of hiking trails. An urban
apartment close to world-class shopping. A mountain cabin with game for hunting.
A beach property with sun and fun for the family. A ski resort condo. A house
on one of the Caribbean islands. Or even a suite in a popular tourist
destination like Orlando or Vegas. Whatever your destination, you might
consider renting for a few seasons in the area to make sure you’d be happy
there long term.
#2: Costs
Can you afford a second home? Even if you can, are you ready to
sacrifice on other things you might otherwise afford if you don’t buy the
second home?
Real estate is a long-term investment choice. There are the high
transaction costs of buying and selling to consider. And by nature, real estate
investments are not liquid assets. It takes time to sell. You can’t decide
today that you want to sell and have the cash in your bank account next week or
even next month.
So, you’ll need to accurately estimate the purchase price you
can comfortably afford. And you need to carefully tally the total cost. Of
course, you have the normal costs of maintaining a home. Wear and tear is
inevitable. And appliances break. On top of that, you have monthly utilities,
annual property taxes, HOA or condo fees and insurance coverage, to name the
biggest expenses.
Vacation or second homes can have additional costs to budget
for. There are property management fees, liability insurance and activity fees.
There are periodic cleaning costs between tenants if you’re renting. If your
new place has a pool, there’s the cost of winterizing and other maintenance
costs. And don’t forget flood or hurricane insurance and a security monitoring
system. Also, you may plan on vacationing at the property or regularly checking
on it. So, you need to budget travel expenses to get there and back.
I have friends with a vacation home on St. John in the Virgin
Islands. It’s beyond lovely, but it’s also very expensive to get to. And since
it’s an island, all consumables arrive by ship. That means groceries and gas
are extremely expensive while you’re there. Properly planned for, though, these
costs will not be a surprise.
Remember, real estate is a long-term investment. You want to
feel secure that you can afford to own it for more than a few years.
#3: The Mortgage
Assuming that you don’t have enough cash sitting around to buy a
second home, you’re going to need to get a mortgage.
To see if you qualify, you’ll need to know your debt-to-income
ratio, or DTI. This is how much you owe in relation to how much you earn. Most
lenders don’t want a buyer’s total debt to exceed 36% of their income.
It’s not unusual for lenders to require down payments of between
25% and 40% on second home or vacation property loans. Before you start looking
at a certain property price range, be sure you’ve realistically saved enough
for the down payment.
You will likely need a higher-than-average credit score to
qualify for a second mortgage. 725 is typically the minimum credit score
lenders will consider. And interest rates on second home loans are slightly
higher than the rates for primary residences. Maybe the difference between 5%
and 6% doesn’t seem like much. But over the course of a 30-year mortgage, that
difference can be hundreds of thousands of dollars.
#4: Lifestyle
One of the main reasons people consider buying a vacation home
is to have the freedom to go to a place they enjoy whenever they want. You
don’t need reservations. You have the key. You can pack light because you keep
extra clothes at the property. And the pantry there is already stocked. You
know you’ll like the location and accommodations because you personally chose
both!
Thinking long term can help you make an even better choice. Many
people plan on eventually retiring to their second home. If that’s your plan,
it opens up a whole new set of parameters to consider. And decisions to make.
You’ll want to make sure
the layout and location of the home will fit your retirement needs. A
four-story urban townhouse might have too many stairs for when you’re 65 years
old. That remote home in Nicaragua may not have access to the quality of urgent
health care you may need in your golden years.
#5: Rental Income Potential
You can offset some, or in some cases all, of the costs of owning a second home by renting it out. You can do this for short-term stays if your property is located where vacationers would want to visit. Or rent it longer term if you’ve purchased the property as your retirement home but haven’t retired yet.
Your vacation home will
likely be a place where others want to visit. So you can charge premium rates
for your rental. You need to keep in mind, though, that the cost of buying and
maintaining a vacation rental property is
typically more than that of a regular rental property. And there’s an off season during which
you’ll have high vacancy (and lower rental income if you are able to rent it at
all).
Like any other real estate investment, the numbers have to work,
and you must do proper due diligence. Ideal summer vacation homes—the ones that
are the perfect distance from amenities, the right size and in good
neighborhoods—can be in high demand. That means it’ll likely take time and patience
to acquire one at the right price.
Interested in a second home or an investment property? Call me now at 443-745-4806 and let’s look.
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