Buying A Second Home
Perhaps your dream is to buy a second home where you’ll eventually retire. Or you want a vacation home on a lake where your family can build memories. You can use this checklist to identify priorities and begin planning.
KNOW WHAT YOU CAN AFFORD
Do you have a buffer? Underwriters want to see that you have a reserve to cover about six months’ of mortgage payments for both homes.
Plan for a larger down payment: Some lenders require a higher down payment for your second home — up to 30 percent.
How much debt do you have? Lenders will pay a little more attention to your debt-to-income ratio when reviewing your loan application. A ratio of about 40 percent can be a safe bet.
Hint: If you plan to rent your second home and generate income, be sure to let the lender know.
Look at interest rates: Increased risk often means increased interest. It’s not uncommon for second homes to be subjected to higher interest rates.
Consider operating expenses: Add up the cost of utilities, snowplowing or mowing and other costs — both upkeep and repairs. You’ll also need property insurance.
KNOW WHAT YOU WANT
Is it a vacation home? You want it to house your family and guests comfortably. And make sure the travel time fits your lifestyle.
Will you retire there? Maybe you’re buying a second home that fits your family now, but you’re not sure it’s where you’ll retire someday. If that’s a possibility, consider that you may want to sell the property at some point in favor of another location.
- Will the home meet your needs as you age?
- Is it the right size?
- Is it too far for friends or grandchildren to make easy visits?
What activities are you looking forward to? Is this a lake home where you intend to water ski or would you prefer to spend more time relaxing in seclusion? Don’t buy a lot on a busy lake if the sound of jet skis would disrupt your painting or reading. Also, make sure you’re looking in a market that has activities you enjoy.
What time of year will you spend there? Buying a summer or winter home is altogether different than buying a home for all four seasons. If you’re looking for a place to spend winter months in a warm climate, you’ll need air conditioning, but what about a garage or a furnace? If it’s a summer lake house, do you need a furnace or will you close it up for winter? Can the house be retrofitted to meet your needs?
Will you rent it out? You’ll want to consider location, size and amenities that appeal to renters.
When will you sell? If this is an investment you’ll sell, find out how properties have performed in that area over time — and that property in particular.
Consult a tax professional about the ramifications of owning a rental property. Below are a few considerations:
- If you use a home for your own enjoyment rather than as rental property, mortgage interest is deductible just like on your first home — up to a maximum for combined debt.
- You can deduct property taxes on your second home, whether you rent it out or not.
- Your home is considered a rental property if you rent it more than 14 days a year. Essentially, you will:
- Report rental income
- Deduct expenses at the percentage you rented it versus used it personally. Note: Fix-up days don’t count as personal use.
- Deduct property manager expenses
- Make depreciation deductions based on the percentage you use it for rental
- Will school or work commitments affect your ability to use your vacation home?
- How far is it from your primary home? Is it close enough for weekend visits or are week-long trips more reasonable?
- Will you need a property manager to watch the house?
Buying a vacation or second home is exciting. And it’s definitely a dream worth pursuing!
Related Topics: At Home