Things to Know Before You Buy a Second Home

The appeal to buy a second home is grounded in truth. It is proven to be an excellent investment and a great lifestyle upgrade.

Demands for second homes are on the rise, which is more than twice the need for primary residences. Low mortgage rates and clamors for vacation properties influence affluent Americans to purchase additional houses. With around 80% of mortgage-rate locks resulting in actual home purchases, buyers are even more confident heading towards this investment route.

But whether you plan to buy a second house as a real estate investment or an upgrade to your lifestyle, you need to look at the big picture. The purchase of a second property should not go against your other goals, such as paying off an existing debt or saving for retirement.

Costs of Buying a Second Home

Graph showing the steep rise of demands for second homes

While another mortgage is the most obvious cost you’ll incur with a second home, there are other expenses as well. Understanding the costs involved is important as they can add fast if you are not aware of them. Furthermore, the actual amount will differ depending on the purpose of your second home. Before you take the first steps, you need to consider the following costs:

  • Insurance: A second home generally has a higher cost of insurance compared to your primary residence. Most lenders see this as riskier to insure, especially if it is going to be vacant most of the time. Before you shop around for a new policy, though, it is always best to check your current insurance provider if your current policy can cover a second home.
  • Maintenance: This cost is essential for those who plan to make the second house for vacations only. Purchasing a luxury home in a reputable housing community can somehow relieve you from some of these responsibilities. For example, Reeder Grove at Washington Trace – where the property manager helps keep the exterior of the property in good order – is a maintenance-free home.
  • Utilities: Unless your home is for a rental and you have a tenant occupying it, you will need money to shoulder utility expenses. Even if the house is unoccupied, you need to maintain its condition so that it’s livable. You’ll also need to invest in a security system if your primary purpose for buying a second home is to have a vacation house for your family.
  • Vacancy: Renting out a home can help you with paying for the mortgage. But what if your long-term renter suddenly moves out or chooses not to renew their lease? You must be ready to pay for your loan even during dry spells. You’ll also need to consider repairs and renovations to make the house ready for the next occupant.

Two Types of Second Home

The mortgage process and tax benefits differ depending on the purpose of your second home, so you must straighten it out early on. Changing the intention of your new home from being a personal residence to rental property within 12 months of your initial mortgage approval has its own risk. It can cause an investigation based on occupancy fraud.

Second Home as Additional Property

A second house that functions as a vacation home or an additional property you will live in is an upgrade. Most homeowners take this route after they pay off their primary residence. However, declaring your next home purchase a second home is not enough. Fannie Mae has these set of guidelines to qualify a property as a second home, such as:

  • For a portion of the year, you need to occupy the home.
  • You can rent it out, but for no more than a total of 180 days in a year.
  • You need to ensure that the home is suitable for year-round occupancy.

In general, lenders would consider a home purchase as a second home if it’s at least 50 miles away from your primary residence. Some even require that the new house have a better valuation than your existing one.

Second Home as Investment

If your intention in buying another house is to generate more income, then your second home is an investment property. While you can still reside in it from time to time, some lenders would still consider the house an investment property if you are going to rent it out. Are you planning to flip this new house later or use it for commercial purposes? Then it is also considered as an investment property.

Main Differences Between Investment and Upgrade

Infographic showing the key differences between a second home and investment property

Tax benefits are clear-cut, while qualification requirements and mortgage rates differ from lender to lender. Regardless of the variation, the differences between a second home used as an investment property and one used as a secondary residence are the following:

Financing Differences

It’s a lot easier to finance a secondary residence compared to an investment property. The interest rates are usually comparable to market rates offered to primary residences. Credit qualifications are also very similar.

When it comes to an investment property, mortgages are harder to qualify for and can be more expensive. Most lenders require a higher credit score and charge higher fees. However, these challenges come with the massive benefit of using your anticipated rental income to qualify for the mortgage.

Tax Benefits Variations

The criteria set by the IRS revolves around the owner-occupancy threshold. A home would be an investment property if the owner used it for shorter than 14 days each year or less than 10% of the total days they rented it out. Otherwise, the property is a second home. As such, tax breaks differ depending on the purpose of the second home.

Second homes that qualify as personal residences are eligible for mortgage interest tax deduction. You could deduct the interest paid on payments of up to $750,000 unless you borrowed equity against your first home.

While investment property owners can’t use this deduction, they can deduct their interest on a mortgage as an expense on their rental income. They can also claim an annual depreciation expense so they can even lessen their taxable rental income.

Upgrade Your Lifestyle with a Second Home

A second home is an alluring project for those who want a vacation home or another income source. Regardless of your purpose, when you own a second home, you have a chance to upgrade your lifestyle and diversify your assets.

Choose Oberer Homes for your second residence and experience the luxurious living you deserve.

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