Buying a second home is truly one of the most important and exciting investments you can make in your lifetime, but this decision also brings along with it a few unique considerations. Millions of people invest in a second home for several reasons such as to use a vacation home, which they can rent our when they’re not there. But there are several financial aspects to consider before you sign the deal for that house by the lake. So here are a few questions to ask yourself in order to make the right choice.
The Cost Of A Second Home
The sale price is not the only cost associated with buying a second home, but there are other expenses to consider as well. So regardless if the vacation home is big or small, you still need to factor in other expenses into the equation such as maintenance fees, utilities, property taxes, mortgage and some of these may be slightly higher than you’d expect them to be. Add to this, when you do not live at the second home, you are not able to take care of regular maintenance, which could turn small problems into much bigger and expensive problems.
A good rule of thumb to consider is to set aside roughly 1 percent of the homes purchase price for annual maintenance costs. So for example if you bought a home for $200,000, it is wise to set aside approximately $2000 in annual maintenance costs such as replacing a new furnace or emergency plumbing. If however, it is an older home you’re looking to purchase, then consider increasing the annual maintenance costs from 1 to 2 percent in light that older homes present more problems when compared to older ones. Also keep in mind that insurance premiums are generally higher for vacation homes because they are considered high risk by insurance companies as you will not be living there.
Can You Really Afford A Second Home?
Buying a second home is not a great way to spend your vacation time, but is rather a money decision, which should not be made until all your other financial commitments are in good order. Some questions to ask yourself with regards to this aspect are if you’re debt free, have you saved any money for retirement and if you can easily afford the closing down payment and closing costs of a second home.
Adding to this and in light that mortgage rules aren’t as stringent as they used to be a few years ago, lenders will carefully peruse your debt-to-income-ratio, which is the amount of money you can afford to payout after your monthly debts such as car loans, student loans, etc.
The Reason To Buy A Second Home
Many people who buy a vacation home consider it to be costs savings tool, where they save on lodging fees that they pay when they make their monthly/annual trips. But if you really think about it, for the amount of money that you’ll be shelling out on a vacation second home such as mortgage payment and insurance costs, you’ll be able to take a lot of nice trips each year and more frequently. Another perspective is to view the second home as a place where you plan to retire or even as a home that you sell down the line if the property appreciates in value that is.
How Are You Going To Use The Home?
Two important questions to ask yourself is if you’re going to be renting out your second home at any point to help cover some associated costs or are you buying it exclusively for yourself to live there. If you’re buying a second home for your own personal use, then you can choose a home that you like, but if you’re investing in a second home with the intention to attract tenants, then you have to consider several other aspects that attract tenants such as the home’s location.
Is It The Right Property If You Do Rent The Home?
If you’re planning to rent the property exclusively, then you may want to consider what a person might desire in a vacation home. Consider things such as its distance from tourist hotspots, the beach, etc.
Will You Need The Services Of A Property Manager?
If you’re willing to overlook all the maintenance costs of the home and all though the year, then skip this question. But if you need to hire a property manager to do the legwork for you, then factor in their fees as well.
Where Is The Home Located?
Consider the location of the second home before making an investment because buying one near the beach is far better than buying one in a region that regularly attracts wildfires.
Are You Making A Rash Decision?
Finally and just like any large purchase, you should make sure that you’re not making an impulse and emotional decision. The key is to do extensive research on if the second home is right for you and if so its purpose and location.