Buying a Second Home? Consider 3 Questions
Buying a second home is a big step. You’ve already achieved the American dream of owning your own home. Now you’re looking to buy a secondary property. Perhaps you’ve got your eye on a vacation or retirement home. Or maybe you want to purchase an investment property to rent or flip.
Whether you want a getaway spot or an income-generating property, a second home can be a great investment. However, it’s also a huge financial decision that shouldn’t be taken lightly. You’ll want to step back and evaluate whether it’s the right move for you. Let’s take a closer look at three questions that can help you decide.
1. Why Do You Want To Buy a Second Home?
This may seem obvious, but it’s important to take some time to consider your motivations. There are plenty of good reasons to buy a second home, but sometimes people feel the need to buy another property mostly to keep up with their social circle. You don’t want to take on another mortgage strictly to keep up with the Joneses.
That said, a secondary property can be a sound investment in your future. Purchasing a second home can make sense if you want a:
- Vacation home you’ll use frequently
- Retirement home for your golden years
- Rental property in the right market
- House to flip if you have a plan
If you want a vacation home, then you’ll also want to consider where you’ll most love returning to time after time. Those who want a beach house may be interested in Florida vacation homes, while those who prefer a lake or mountain cabin may be more into Idaho real estate. Both states are increasingly popular with buyers looking for vacation and retirement homes.
Investing in real estate is another common reason people buy second homes. And considering the pressure the hot housing market is putting on the rental market, it could be a good time to get a rental property up and running. Of course, you’ll want to treat a rental property as an investment and consider the best places to invest in real estate before purchasing.
2. Can You Afford Another Mortgage and Other Costs?
When planning for your second home, it’s important to budget as far into the future as you possibly can to avoid any surprises. We’ve outlined a few of the financial considerations you should keep in mind before buying a second home:
Down payment and mortgage
Since you’re already a homeowner, you know the drill. Unless you pay for everything upfront with cash, your second home will have a down payment and a mortgage. And because second homes have a greater risk of default than first homes, they often have higher down payment requirements and higher interest rates.
Upkeep and maintenance
In addition to the down payment and mortgage payments, you’ll also want to budget for the costs associated with maintaining a property. As with your primary residence, you’ll be responsible for anticipated expenses like property taxes and surprise expenses like repairs. Depending on the property, there may be other costs like homeowners association fees.
Debt-to-income and credit requirements
Just like when you applied for your first home’s mortgage, lenders will consider your debt-to-income ratio and your credit score. A DTI of 43% is a common rule of thumb, however, you may find that lenders have stricter requirements for second home mortgages than they do for first homes. Similarly, a higher credit score may be required.
3. Do You Have Time to Manage a Second Home?
There’s the financial aspect of purchasing a second home, and then there’s the knowledge and work it takes to manage a second home. If you’re buying a property that’s already perfectly suited to your needs, then there may be less work involved. But if there’s any fixing up to be done, you’ll be investing your time either DIYing it yourself or vetting and scheduling experts. You’ll also want to factor in the extra time it takes to care for another home, inside and out.
And if you’re considering taking on a rental property, then you should consider the time you’ll spend handling landlord duties. While owning a rental property is considered passive income, that doesn’t mean you won’t be putting in time and energy. As a landlord, you’ll manage everything related to the property — from collecting rent to handling repairs.
Next Steps: Buying a Second Home
As you can see, buying a second home is an exciting opportunity that shouldn’t be taken lightly. Since you don’t want to end up with a property you don’t enjoy, can’t afford, or don’t have time to manage, it’s essential to carefully consider the above questions.
Once you’re ready to buy a second home, there are five steps to make that dream a reality:
- Decide where you want to buy.
- Check your credit score and DTI ratio.
- Get your down payment together.
- Shop around for custom rates.
- Start house hunting!
Investing in a second home can be a great decision. Whether you’re dreaming of a beach house or a lake cabin, a suburban rental property or something in the city, the right second home can be a smart move. It could be a way to save future vacation expenses or earn extra money. When you’re ready to shop around, compare top mortgage lenders and get custom rates.