So you’re thinking about buying a second home . . . Congratulations! It’s exciting just to be thinking about buying a second home, and it means you’re in a good financial position to consider new opportunities.
Buying a second home is a big step. You’ve been through the home-buying process before, but this time there are more factors to take into account. The purpose of your second home, lender requirements, available mortgage options, and ongoing monthly costs will all be different this time around.
The one thing you don’t want to do is buy your second home as if it’s your first.
- Second homes are purchased for different reasons, including rental or flip-and-sell investment properties, vacation homes, or upsized new primary residences.
- Mortgage requirements are stricter for second homes.
- Second-home buyers should never be stretching their budget to afford their new home.
- It’s best to take a conservative approach to budget expenses for a second home.
Establish How You’ll Use Your Second Home
It’s important to establish exactly how you’ll use your second home before you get started on your search. Some common second-home purposes include:
Vacation homes are one of the top ways people use their second homes. Some people just want to get away to their favorite destinations; others look for a place they can enjoy occasionally now and retire later down the road.
Either way, if you’re looking for a vacation home you’ll want to ask yourself:
- How easy is it to get to my vacation home?
- Are there significant expenses involved in getting there (ex: plane tickets)?
- How often will I spend time there?
- How will I take care of the property upkeep when I’m not there?
People take two primary approaches to investing in real estate:
- Rental Property: When you’re investing in a rental property, consider the success of existing rental properties in the same area. Take into account the time and cost of managing the property (this will differ for short-term vs. long-term rentals) and decide if you’ll do it yourself or hire a property manager. Know how you’ll handle expenses when you have a gap between tenets or a lull in short-term rentals.
- Flip and Sell: When you’re thinking about flipping a property you’ll need to consider whether or not you have the skills and expertise to do it successfully (if you don’t have it yourself, you’ll need to hire a team that does). Keep in mind that flipping houses is not as easy or glamorous as it seems on HGTV. It’s hard work and you can easily end up losing money if you don’t know what to look for when purchasing a property.
However you plan to use your second home, it’s important to consult closely with your real estate agent, mortgage lender, and tax accountant about your second home so you are clear on all of the financial implications of your investment.
New Primary Residence
If it’s a buyer’s market or your first home is in an awesome location, you might be considering renting your first home instead of selling. This means your new primary residence will technically be a second home.
If you’re thinking about renting your first home, ask first:
- What is the average rental income in the area? Will it cover the mortgage and bring in a profit?
- Can I afford it? (This one’s important — second homes require larger down payments, and you’ll need to afford it without selling your first home.)
- Does my mortgage allow me to reclassify this home as a rental? (Some will inflict a penalty if it’s done too soon.)
- Will there be demand for a rental or is there a risk of gaps between tenants? (This depends a lot on location.)
- Will I manage the property myself or hire someone to do it? How will this affect profit?
Don’t Stretch for a Second Home
When you’re buying your first home, it can be acceptable to stretch your budget (responsibly!) in order to purchase a primary residence. When you’re buying a second home, your financial situation should be totally comfortable and secure.
Even if you want to, it’s hard to stretch your budget for a second home because mortgage lenders are stricter. Some mortgages don’t cover second homes at all (like VA or other government loans), lenders that do will require a bigger down payment, and interest rates for mortgages and homeowners’ insurance will be higher.
Requirements for your income, credit score, and debt-to-income ratio are all also stricter for second-home buyers.
When you’re buying your second home, it’s better to meet all financial requirements and then some. If you don’t feel totally confident in your financial situation, it’s better to wait.
Double Up on Everything
Second-home buyers have to double up on all home-related expenses.
Make your budget as inclusive as you can. Account first for recurring home costs like your mortgage, homeowners insurance, utilities, and tax expenses. Then, consider incidentals like home repairs or property upkeep and home details like furniture and decor.
Give yourself as much flexibility as possible. It’s better to have extra cash later than to be over budget and not have enough to cover your expenses.
Getting Ready to Buy
In most cases, buyers are looking for second homes as a place to enjoy or an opportunity to generate income. Whatever your situation, you want to approach buying your second home differently than your first, when you were making a more traditional home purchase.
Above all, you want to make sure you’re ready for this new endeavor so you can enjoy the benefits of your second home.
If you’re ready to look for a second home in the Dayton area, Oberer Homes can help you find a perfect property.
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