Are you ready for a second home?
Whether you are looking for a home in a resort community like Daytona Beach, or maybe you would like something quieter and not in a touristy location, buying a second home is a big commitment. You might be thinking about it, but is it a commitment you’re ready for?
In 2018, the National Association of Home Builders reported that there were 7.5 million second homes nationwide. The majority were in Florida, as well as California, New York, Texas, Michigan and Arizona.
Here are some things to consider when evaluating whether or not you’re ready for a second home.
1. The financial impact
Before buying a second home, it is important to have a complete overview of the full financial impact. You bear the full weight of the financial impact on your shoulders, and it’s going to happen twice. If you have a problem with your primary residence that is expensive to fix, and then there is a problem with your secondary residence, you are going to have to deal with consecutive bills.
Even outside of situations where things go wrong, you will have your second mortgage payment, which will include your landlord’s insurance and property taxes, maintenance, utilities, HOA fees, travel costs to get to the house, and rental management fees if you’re going to rent it out.
You must make a detailed budget and include contingencies. For example, will you need flood insurance, and if so, how much will it cost?
Some questions to ask yourself before deciding on a second home will include whether you are currently able to save at least 15% of your current income for retirement. Is it something you can comfortably continue to do, even with the added expense of a second home?
Do you have at least six months of your expenses in a liquid, easily accessible emergency fund? Even better, it’s nine months.
Do you have credit card debt? Is your current accommodation reimbursed?
If you can tick those boxes, then you might be in a position where you can really think of a second home.
2. How second mortgages work
If you are still repaying the original mortgage on your principal residence and want to buy a secondary residence, you will need a second mortgage. It could be an actual second mortgage, or it could mean you get an equity loan in your current home or a line of credit in your current home. You can also refinance in cash from your current home.
Banks will look at the same factors as with any loan, such as whether you have enough income to cover the costs, your credit report, income, assets and work history.
3. Travel Considerations
Are you going to enjoy your second home sustainably? Will the travel time to get there quickly become a burden?
Do you want to be tied to one place long term?
You need to realize that if you buy a second home, it will impact your ability to travel to other places. If you know you like to travel to the same place year after year, that can be great. If you want a second home and still travel to other places, your budget may not allow it.
You must remember that a vacation home is still a home, so you need accessible amenities. For example, are there grocery stores and restaurants nearby? What about gyms or other things you use in your daily life?
4. Are you going to rent it?
If you can rent out your second home, you may be able to cover its costs and more.
It’s not always an easy task either. For example, the laws determining whether or not you can rent a home vary by state, city, and sometimes even neighborhood. In New York, for example, listing your home on Airbnb is illegal unless the resident lives in the apartment or is rented for more than 30 days.
If you’re considering a condo as a second home, you need to figure out what the regulations say about short-term rentals.
Some communities will have a restriction requiring a minimum of 90 days rental with prior approval from the tenant association.
If you are able to rent a house, you need to think about the costs that will come with it. For example, you will need appropriate insurance and you will need to budget for maintenance and cleaning services.
If you are considering renting a second home, the times when you most want to be there will more than likely be the most requested times by tenants. You will need to decide if income is more important or if your ability to enjoy your second home is your main priority.
If you have a second home, it will be classified by the IRS as personal residence or rental property. If you rent it 14 days or less per year, it is a personal residence. If you rent it for more than 14 days, it is a rental property. You will have to declare your rental income, regardless of the classification.
If your vacation home is classed as rental property, you cannot claim a mortgage interest tax deduction, but if you spend more than the rental income, you can claim losses.
6. Is it a good investment?
If you’re considering buying a second home, you might want to consider whether or not it’s a good long-term investment.
Although real estate tends to be a good investment, that’s not always true. There are real estate fluctuations and even accidents, so can you handle a situation where your home could lose up to 30% in value?
If your equity was wiped out, should you foreclose?
The most important thing to do if you are considering a second home is to run the numbers. Next, you want to make sure you’ve considered all of the potential costs, but also your lifestyle and personal preferences before making that big decision.