If you're thinking about buying a second home for vacation or rental purposes, then you'll need to do some homework before you get serious about shopping.
Homeownership is a big deal, and buying two homes can either be a path toward long-term income or a mistake that will sink you financially.
What do you need to know before you buy that second home? Here are 11 questions that you should ask (and answer) before you make any offers on the second home of your dreams.
Why do you want a second home?
The reasons for buying a second home vary widely, from "I want to fix and flip the house," to "I want a rental property for long-term tenants," to "I've always dreamed of owning my own vacation home on my favorite beach," to "I'd like to retire here and buying a home seems like a good first step."
Obviously, fix-and-flippers are going to have very different criteria than future retirees looking for a place to live when that happy day comes. So it pays to think about your reasons for wanting that second home and then plan accordingly.
You don't need to pick just one reason, of course: Maybe you want to rent the home out now and retire in it after a few years go by, for example. But it's a good idea to figure out your "why" before you get serious about this process.
What can you afford?
Lenders follow different guidelines for second-home mortgages than for primary residences. Some buyers may be able to purchase a home on a low-down-payment or no-down-payment plan if it's a primary residence, but second homes usually require at least 20% down. Mortgage rates are also typically higher on a second home.
Talk to a financial planner and a loan officer to discover whether you're really in shape, money-wise, to buy a second home. Consider that you'll need to pay for insurance and taxes on a second home in addition to the mortgage. Make sure that you're in a good position to make this move and that a worst-case-scenario outcome wouldn't completely sink you.
Can you manage the maintenance and upkeep costs?
In addition to the mortgage, you'll have to consider the costs of maintenance and upkeep. This is going to vary depending on why you want the home -- for example, if you've got long-term renters in the property, then you probably don't need to hire someone to clean the house every now and again. But you will need to have some money socked away in case a pipe bursts or the furnace needs to be replaced.
For vacation homes or short-term rentals, a regular cleaner is probably a good move, in addition to someone managing the landscaping and checking on the place in general. So factor these costs in to your budgeting before you take the plunge.
Where will you buy?
Maybe you've had that second home staked out in your head for years and you know exactly where you want to buy. In that case, congratulations!
But maybe you have some flexibility or options in terms of where you're going to buy. If that's the case, it makes a lot of sense to do some in-depth research into any places you're considering. Go spend a week or two in each area and see what it's like. Make a list of pros and cons, then compare them. Ask locals who live there and others who have vacation homes what they love and don't love so much about it. This should help you narrow down the location so you're sure it's perfect for you.
Is this the right home for you?
Once you start actually shopping for homes, it can be tempting to grab the first one that seems to fit the bill, but think carefully before putting in any offers.
Is the home conveniently located? How far is it to big attractions and public transportation? Do you need a yard, and is there one? How about a deck? How does it stack up against other homes in the area? Will it be rentable?
You likely can't answer all these questions on your own, but an experienced real estate agent can definitely help you answer the last two.
What are crime rates like in the area?
You want your second home to be safe even when you're not there -- and vacant homes can be magnets for break-ins. So look at the reported crime rates in the neighborhood (and even on the block if you can find that information) and decide whether you're comfortable with what you're seeing or whether it makes you a little bit nervous to think of an expensive asset sitting in the midst of that environment.
Are there natural hazards or events you need to understand?
California has earthquakes and mudslides, Florida has hurricanes, and the midwest has tornadoes. Before you buy, make sure you're spending some time learning about what natural hazards or events are common in the area -- and ask about supplemental insurance, too.
For example, you'll know whether or not you need to purchase flood insurance because you're buying a home on a floodplain (the Federal Emergency Management Administration, or FEMA, manages a flood insurance program that mandates insurance on certain homes). But you'll have to pay extra for earthquake protection. To know what makes the most sense, it helps to understand the natural patterns in the area.
Do you want to make upgrades?
Are there changes you'd like to make to the home? Maybe add a deck, a garage, or even an entire new room to the home? Different municipalities have different rules about what permits are required and when, so make sure you're getting expert advice about what you'll need to do to make those improvements happen.
You might also want to budget for those upgrades, especially if you are planning to rent the home. The sooner you can get renters in the home so you can start collecting rent, the better, so ask general contractors for quotes and start planning those improvements.
How much time will you spend there?
If this is a vacation home, one thing to consider is how often you plan to stay there as the owner. There are tax laws around how often you can rent your own vacation home and still collect the maximum tax break (it's either 30 days or 10% of the total days the home is rented to others, whichever is greater), and you'll also want to factor in any to-and-fro travel expenses.
If you're renting the home, this is still a good thing to figure out. For short-term rentals, you'll want to check in every now and then (or possibly hire a property manager), and even for longer-term rentals, it's helpful to be a landlord with at least somewhat of a local presence. Plan to take a couple of trips a year to check on your property.
Do you need a property manager?
Some second-home-owners are ready and willing to do it all, from finding and screening tenants to emergency repairs after hours.
And that's great if it's your plan -- but if it's not, then you might want to consider hiring a property manager to keep an eye on your home and ensure everything is in good working order, safe, and secure. Property managers can oversee any help you've hired, like cleaners or landscapers, and just generally make sure that your home is as it should be.
A professional property management firm is always one option, but there may also be a freelance local who's willing to take care of your home for a little extra cash every month. Consider both options (and make sure any property management firms or freelancers you choose are trustworthy by checking references very, very carefully).
What's your exit strategy?
Maybe you want to retire in the home and you don't think you need an exit strategy. But anybody who isn't planning on living in a second home is going to have to decide on an exit strategy: Under what circumstances will you sell the home?
It could be "after I've owned it 10 years" or "after its value increases by at least $50,000" or "after I have paid off the mortgage using rent payments." But make sure you've created some limit for yourself so that when the time comes to move on, you'll know it.
