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If you’re deciding whether to buy a second home, you’ll want to consider the full financial impact, including income potential if you plan to rent it out. Here are some key factors to think about before you buy a second home, and how to make it happen.
Reasons to buy a second home
A second home can serve a variety of purposes. You might choose to purchase a second property to:
- Use it as a vacation home or home away from home: You might buy a second home in a vacation spot you or your family visit (or want to visit) frequently, or maybe close to an office you visit often for work.
- Rent it or your first home out: You might rent a second house out to other vacationers or short-term renters, or move into it and rent out your first home. Either way, you’ll get a relatively passive income stream as you collect rent.
- Leverage as an investment: You might buy a second home in an up-and-coming housing market with the intention to flip it and sell for a profit.
If your goals fall into the second or third category, these use cases can affect the requirements you’ll need to meet to get second-home financing. In general, if the home is utilized more as an investment or rental property than for personal use, it’s considered an investment property rather than a second home.
Second homes vs. investment properties
Second homes and investment properties aren’t the same thing. If you’re borrowing a mortgage to buy another home, your lender needs to know how you intend to use the property. That’s because there are separate down payment, credit and underwriting standards, as well as interest rates, for second homes versus investment properties.
The purpose of the home also impacts your tax returns: how you report rental income and how you take deductions. Likewise, if you flip the property, you might be responsible for capital gains tax. You can learn more about both in IRS Publications 523 and 527.
How to buy a second home
Buying a second home is a lot like buying your first property. If you’re not purchasing with cash, you’ll need to get preapproved for a loan and work with a real estate agent with experience in the area where you’re buying.
The upside: Given that you’re likely buying this home as an investment or vacation home, you might be under less time pressure than you were when buying a home you planned to move to immediately. Use that to your advantage to be choosy and find the perfect home.
Key steps to buying a second home
- Clarify your goals.
- Get preapproved for a mortgage.
- Find a real estate agent.
- Go house-hunting.
- Make an offer.
1. Clarify your goals
Before you do anything else, get clear about how you plan to use your second home and pay for it.
If you want to use the property as a vacation home part of the year but rent it at other times, for example, you might need to meet different criteria to qualify for a mortgage.
There are tax implications, as well. It’s worth talking to a financial advisor or tax professional to understand what you’re taking on.You’ll also need to get a sense of how much your second home will cost long-term.
You’ll need a separate homeowners insurance policy, potentially with add-ons like flood insurance. You’ll also pay for expenses like furniture and decor, utilities, security and landscaping. If you plan to rent the home, will you want to handle landlord duties yourself? If not, you’ll need to hire a property manager, as well. Consider local property tax rates, too.
2. Get preapproved for a mortgage
When you’re ready to start looking for second homes, get a mortgage preapproval. This demonstrates to sellers that a lender is willing to offer you financing up to a certain amount. You won’t be able to make offers on homes without a preapproval.
Depending on the lender you work with, you can get preapproved online or in person with a loan officer. The process involves providing documents about your finances, as well as a credit check. If you’re deemed eligible for a mortgage, you’ll receive a preapproval letter.
3. Find a real estate agent
This is key: Find a real estate agent who’s plugged into your desired location. The right agent can fill you in on price trends and how comparable sales have fared, as well as resale prospects.
“A good agent knows market trends,” says Nathan Zeder of The Jills Zeder Group with Coldwell Banker in Miami Beach and Coral Gables, Florida, including “how long homes have been on the market; if there are homes not currently on the market that might be available; why one side of the street could be worth 5 percent more than the other; if the direction of the backyard gets better sun; and how close the schools, restaurants, city centers, airports, country clubs and marinas are.
”Putting all of that together, Zeder says, “allows the buyer to make the best decision, not only about the home but about the location they are choosing in their new community.
”When you’re interviewing potential agents, Zeder recommends asking questions about how long the agent has lived and worked in the area and how involved they are in the community.
4. Go house-hunting
It’s time to tour properties to see what fits your needs best. Based on the goals you established, think about what you want in a second home: maybe that’s extra bedrooms for guests; proximity to recreation, restaurants, shopping or transportation; or a mountain or lakeside view. Your agent can help you narrow down your wish list and set realistic expectations for the house hunt.
If you’ve never been to the area before, it might be worth renting for a short time, or at least visiting for a long weekend, to learn the different neighborhoods and local housing trends.
5. Make an offer
Once you find the perfect property, it’s time to make an offer. Based on your preapproval and overall budget, your agent can help you determine an offer price. The seller can decide to either accept, reject or counter your offer. Here’s more on each of those outcomes.
Key considerations before buying a second home
If you aren’t making an all-cash offer on your second home, you’re going to have a second mortgage. Look closely at your budget to determine if that extra monthly cost makes sense for your finances.
You’ll also need to budget for:
- Insurance: Getting second home insurance can be more challenging and complex than for a primary residence. If you’re considering a vacation home on the beach, for instance, you’ll need flood insurance. If you plan to rent your property out, you’ll need landlord insurance. Discuss your coverage needs with your agent and make sure your budget lines up accordingly.
- Utilities: If you don’t plan to use the house much or intend to have your tenants cover utilities, these won’t be as high. Don’t forget about utilities while you’re away, too. You’ll want to run exterior lights year-round for security purposes, for example, or heat to prevent pipes from freezing.
- Maintenance: Second homes need maintenance and repair just like any other property. Even if you plan to rent the place out, the fixes are your responsibility as landlord. You should also plan for exterior maintenance, like snow removal or lawn care.
- Property taxes: These can vary significantly by location, and often rise over time.
- Travel: Consider the cost of getting to and from the home, whether that’s to enjoy on vacation or to manage as a landlord or house flipper.
Depending on how often you rent out your second home, it could be considered an investment property and subject to different tax and occupancy rules. If your mortgage is backed by Fannie Mae or Freddie Mac, for example, that limits your leasing: The property must be “available primarily for borrower’s personal use and enjoyment” for more than half of the calendar year.
The IRS has rules, too: If you rent your second home out for more than 14 days a year, you’ll need to report the rental income. If you sell the home at a profit, you might be liable for capital gains tax.
Buying a second home in a beach resort community sounds like a great idea, but if you live really far from that town, getting there might be so much of a hassle that you don’t go there that much. Think about your lifestyle and find a second home in a destination where you’ll really use it regularly.
If you plan to rent out the house, this is just as important. You might need to be on-site to vet tenants, evaluate repairs and more. You don’t want to have a rental property that’s a headache to manage.