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Considerations to Make Before Buying a Second Property
BY: Brent Landrum
Real estate is one of the best investments you can make, now or in the future. For many, owning a second home is a dream that may seem unattainable, but with interest rates as low as they are, it may be easier than you think. Before you decide to make your dream come true, let’s look at a few of the factors that should be considered.
Ask yourself, “What is the purpose of this property?”
Will you be using it as a vacation home or as a rental property? The former is great, but before you buy, you should be certain that you will be able to use it enough to make the investment worth your while. Also, think about location: Does the property need to be within driving distance of your primary residence, for weekend getaways? If not, you must consider the cost to travel there and how often you will be able to go. While you can always find that great deal on airplane tickets, if you want to go as often as every month, that cost will add up over time.
If you're planning to use the property as a rental, there are tax benefits and maintenance costs to consider.
- If you rent the property for fewer than 15 days annually, you won’t pay taxes on rental income, BUT you can’t deduct rental expenses, such as cleaning, maintenance, etc.
- If you rent the property for more than 15 days annually, you would report the income and pay taxes, BUT you can deduct rental expenses.
A good rule of thumb is to expect maintenance costs to run approximately 2% of the home’s value every year. In addition, having a six-month emergency cash fund can help alleviate any unexpected expenses.
Do your market research!
Chances are good that you may not be purchasing in an area you know particularly well; therefore, you should educate yourself on the local market. Zillow and Realtor.com are great resources to use to get a feel for what similar properties in the area are selling for. From there, you can begin to narrow your search by specifying criteria that are important to you.
Once you've done your homework, it’s time to start making your dream a reality. For next steps:
- Find the right agent or broker. Speak with different real estate companies and agents to understand what they can offer, in terms of local expertise. Are they listening to your needs? Do they seem to know the market and nuances of purchasing a home in your desired area? Trust your gut when hiring someone to represent you.
- Evaluate the price per square foot. This may also help you decide between a single-family home or condo. Understanding what you will be getting for your money will help you avoid overspending.
- Look at the property history. Use the local county website to research your potential property's tax history and valuation. Taxes can make or break a house payment; appreciation is what makes real estate investment a good idea. Be sure the value of the property you're considering has grown over time. After all, you’re not getting into the second-home game to lose money!
Finally, the most important step of all: Determine your budget. Decisions must be made based on:
- Price: Be realistic here, as you don’t want to be “house poor.” Run the numbers and put them into your budget to determine what will work for you. This property is to provide you with joy and/or income, NOT stress.
- Homeownership costs: Include utilities, insurance, maintenance, and HOA fees in your calculation.
- Financing: How will you pay for the property? Look into the pros and cons of both a mortgage and an equity loan. Begin by talking to your local mortgage lender, who can help guide you in the right direction. Knowing your options will benefit you in the long run!
Making a second home a reality may be more attainable than you think. There’s a lot of information to consider when making this type of a purchase, so take your time and do your homework. To explore your options, reach out to one of our lenders today.