The Big Considerations When Investing in a Second Property
For so many of us who have made an incredible living off our property, the temptation is to upgrade. So many people can benefit from getting a second property. Think about how much you can do with a second property, especially in a location like Hollywood or New York. But we have to consider some of the following when we are purchasing a second home:
The Financial Impact
Owning a second home means that you’ve got double the financial responsibility. If you’ve got an abundance of repairs needed in your main home, additional issues in your second home can cause a big impact on your finances. While installing replacement windows or an HVAC system is essential, you’ve got to bear in mind that you will have two bills back-to-back. It’s also important to consider the everyday expenses, which would include some of the following:
- HOA fees.
- Mortgage payments.
- Homeowners insurance.
Therefore, you’ve got to bear in mind a lot of these components. You need to write out a detailed budget and take into account any additional expenses based on the area. For example, home insurance may require additional flood insurance in more rural areas.
The Ability to Travel
If you are getting a second home for vacation purposes, you may think that you are benefiting initially. However, you got to bear in mind that you can start to feel more contempt for the place. A summer home in a place like Clearwater Beach may appeal for the first few years. But beyond this, you may find yourself more frustrated when you are in the middle of hurricane season, which comes with its own costs. You need to ask yourself: do you want to get stuck in the same location for a long period of time?
When you are purchasing a second home, you’ve got to ask yourself if it will impact your ability to travel elsewhere. If you are going there with the family and you have fallen in love with the place, purchasing a property there makes a lot of sense. But you then have to weigh up the challenges of the additional expenses and the traveling.
The fact is that vacation homes are still classed as homes, so you need all of the other amenities to help you feel like you are at home there. These would include grocery stores, restaurants, as well as things like gyms.
Understanding a Second Mortgage
If you are lucky enough to have paid off the mortgage on your primary residence, you still could benefit from understanding how a second mortgage works. A second mortgage means going through the rigmarole of dealing with the banks.
Like any type of loan, banks will weigh up whether you can pay. Your income will be scrutinized, as well as your employment history and any other assets. This means that even if you’ve got a lot of finances distributed, you may want to get yourself in a good financial position. If you have some outstanding credit card debts, it’s always a good idea to consolidate them. Even if you think you have more than enough to get a second home, the banks may think otherwise.
Understanding the Investment Potential
Home values are never guaranteed. For anybody that remembers the housing crisis after 2006, when values dropped by 33%, this forced many homeowners into foreclosure. Residential real estate might appear to be a worthwhile investment, but if you are looking to build wealth you may want to venture into other areas.
Do You Want To Rent Out Your Second Property?
This is a very worthwhile option. If you want to subsidize your second property when you are not there, renting it out can easily keep you afloat financially. But you have to be aware of the laws before you purchase. Laws will vary, not just by state, but in some areas right down to the neighborhood. For example, if you are thinking about buying a condominium, you need to check the condo bylaws. If the condo bylaws in that location allow renters or Airbnb-style rentals, you are okay. But you can’t accept this as a given. In New York City you can’t use Airbnb’s unless the apartment is rented out for more than 30 days, and the permanent resident is living there.
Being a landlord is also a hassle in other ways. Think about the following:
- Cleaning services.
- General maintenance.
- Your time.
The latter one is very important. If you cannot dedicate enough time to renting out a property, it may not be worth your while. Many people love the idea of an extra income renting out a property. However, it can be a big consumer of your time.
Taxes on Vacation Homes
According to the IRS, a vacation home can be either classified as a rental property or a personal residence. If you rent it out over 14 days it is classed as a rental property, but in most cases, you need to report rental income despite the classification. Therefore, if your vacation home is classed as a rental property, you won’t be able to get a mortgage interest tax deduction. It’s always a good idea to speak to a tax professional about any liabilities or deductions.
Should We Get a Second Property?
With all of these things, you’ve got to bear in mind that a second home is a great way to have more real estate or a great escape. However, you have to ask yourself if you really should have a second property. Financially speaking, it could be within your reach but you have to bear in mind many of the financial costs before you make a commitment.
A second home is a big investment, no matter how much money you have, which is why you have to consider some of the following:
- If you have any form of debt.
- Are you saving towards retirement?
- Do you have emergency cash? Have you saved for your children’s future?
It can be a good thing, but you should weigh up a lot of these components.