Think about taking the plunge into second-homeownership? Whether you plan on buying as an investment, a getaway, or a place to eventually retire, take a moment to think about the seven most important steps toward finding and buying your dream second home.
One: Decide whether a second time home buyer makes financial sense
Whether or not you consider yourself an investor, you no doubt want your second-house purchase to be a sound financial move. Yet many second-home owners complain that the house cost more than they’d ever imagined. You’ll want to tally up your likely expenses, work on building up your cash reserve, and, if you plan on renting out the property, determine how much you can expect from rental income.
Two: Decide where, and what type of home you’ll buy
A home in a badly chosen location won’t serve anyone’s goals–the investor can’t sell or rent it, the vacationer won’t enjoy it, and the future retiree may have to pick up and move again. You’ll need to rely on both market research and your own personal preferences. The type of home you buy is similarly important. The demands of owning a single-family home are different from those of owning a condominium, townhouse, or co-op. Which type of home serves you best will depend on factors such as cost, location, and upkeep. Finally, you’ll want to look into unique possibilities such as a fixer-upper, a foreclosure, or a for sale by owner (FSBO) property.
Three: Understand tax implications before you take the plunge
Taxes on your second home come in all shapes and sizes, yet have one thing in common-they can be a burden. However, you can, with some advance planning, save thousands of dollars a year in taxes. For example, sometimes buying a home just over a town’s border can significantly trim your annual property tax bill. Or, buying as an individual rather than as a separate business entity, such as a limited liability company (LLC), can mean taking the federal deduction for mortgage interest paid. And, if you sell your second home at a profit down the road, a 1031 Exchange can, in certain situations, help you defer paying the capital gains tax.
Four: Come up with short-term cash and long-term financing
Most people pay for their home with a combination of a down payment and a loan for the remaining amount. The higher your down payment, the lower the loan, and the more house you can therefore afford. In order to come up with down payment cash (ideally, 20% of the purchase price) you may need to get creative. Using equity in your primary home, borrowing against a life insurance policy, or refinancing your car are among the possibilities explored in this book. Most buyers will also need to get a home loan to help with the rest of the financing. The number of mortgage options available today could make anyone’s head spin. And some of them may tempt you into highly risky behavior, such as paying only the interest you owe for several months or years, only to be walloped with a large, lump sum payment at the end of the loan period. However, by reviewing various mortgage options and sample payment schedules, and factoring in your own short- and long-term goals, you’ll be able to choose a mortgage type that suits you.
Five: Consider Nontraditional Financing
With real estate prices at record highs, you may have a harder time affording a second home than your parents or grandparents did. One unique way to help finance your second home is to tap the “Bank of Family and Friends.” That lets you keep the tens of thousands of dollars in interest you’ll pay over the life of your mortgage loan within your circle of friends or family, rather than handing it over to a bank. Another money-saving approach is to partner with another purchaser, for example sharing a vacation home in the sun. With home prices rising and incomes fairly stable, sharing the purchase of a second home could easily cut your costs in half. A growing number of people have already discovered that partnering with a family member, a friend, or even a stranger who’s looking to invest can make second-homeownership a distinct reality. You’ll want to start by determining whether co-ownership with a particular person is likely to work, and draft a written agreement to deal with likely sources of contention in advance.
Six: Be Prepared If You’re Planning To Be a Landlord
Some second-homeowners plan to rent out their properties long-term with the intent of eventually turning a profit, while others just want to rent out their property periodically as a means to offset expenses. Either way, you’re taking on the role of a landlord, which means more than just following your instincts. Finding good tenants or trustworthy vacation renters, understanding and preparing leases or short-term agreements, and dealing with ongoing management and repairs are just a few of the issues involved with being a landlord. Also, the obligations of managing a long-term rental are quite different from those of a periodic rental.
Seven: Take steps to protect your second home investment
Whether you’re second time home buyer as a pure investment, for a weekend getaway, or as a place to enjoy your retirement, it’s an investment all the same. And, a large one, at that. Protecting your investment starts before you buy and continues long afterwards. For example, you’ll want to get a proper home inspection prior to purchasing the property, so as to deal with some repair issues up front and get a sense of what repairs may be looming. You may want to purchase title insurance in case problems such as past claims on the property surface after the purchase. And, your lender will require that you carry homeowner’s insurance, to protect your property against damage from such causes as theft, fire, flooding, or windstorms. Taking these protective steps will not only guard your home, but your peace of mind.