With the current interest rates at or around 4%, buying a second home seems like a great idea, but what are the potential pitfalls and rewards of buying a second home?
There are many, and this article should help you make an educated decision. We’ll talk about the steps of buying a home, getting approved for financing, choosing the best location for your second house, and closing costs-plus expenses.
Buying A Second Home – Rewards Vs. Negatives
Having another place to live is not only exciting, it can be a great long-term investment property. A second home can be used many ways from a vacation home to an income property; it just depends on what you want to do with it.
The rewards are obvious. Your vacation home could be anywhere in the world from a warm sandy beach in Florida to a small cottage in old town Italy, the sky is the limit.
For an income property, I would recommend you buy within your own city as it would be quite difficult to maintain an income property from great distances. Positives? New location, fun vacation property, possible passive monthly income, and equity for a long term investment.
Just as it can be exciting to own a second home, it can also be a huge hassle. As you know, owning a home brings major responsibility. A second home will only double that responsibility. If you want to go with a vacation home, you have to consider the costs of having someone babysit if for you and maintaining the home while you’re not there. A property manager would be a wise choice, but again you have to find one you can trust.
For an income property there are renters to deal with and repairs. Renters usually aren’t the most house friendly people as many times they will leave the home is a worse state then when you rented it out. Negatives? Cost, maintenance, dealing with renters, hiring a trustworthy property manger, and the added stress of worrying about your investment property.
Once you understand the rewards and the negatives of a second home, you can be smart about your purchase. The decision to buy a second home is ultimately up to you. Do you have the extra cash to maintain the home? Are you comfortable managing renters yourself? If you feel you can handle it, the rewards greatly outweigh the negatives.
Knowing that you can pack up and go to a far off land to enjoy a whole new environment without having to worry about hotel accommodations is a great feeling. Not to mention the investment value. If you buy in the right locations, you can rest assured that the home’s value will maintain a steady increase for years.
Key Steps To Buying A Second Home & Investment Property
Patience & Location Is Key
The biggest advantage you have when buying another home is the fact that you already own a home. You can be patient. It’s not like you don’t have a place to live, this gives you the patience needed to find the perfect place. Your first step should be to determine a location and weigh the positives vs. negatives of the type of location you want.
For a beach property, you’ll have to be wary of potential hurricanes and flood areas. Stay on the West coast if you choose the United States or possibly the East coast of Europe as Hurricanes are rare.
If you plan to buy inland, be sure to find an extremely unique property with value outside of the house itself. Something like a tourist town with water close by is a good choice. Look for something that makes the property unique enough that it can maintain value during a slump, yet not be so crazy no one would ever want to buy it in the future. If you find the perfect place sit on it for a little while to ensure you really are ready to make a purchase.
- Don’t Overpay
Play the game. Submit a low offer and see where it goes. In today’s market, many sellers are desperate to sell, and you could end up with a fantastic deal if you stick to your guns. Be sure you try and get everything under the sun.
You have the ability to play hardball considering you aren’t buying a primary residence. If the seller isn’t budging, be reasonable, but don’t be afraid to walk away.
- What’s Your Purpose?
Next you’ll need to determine your purpose. Are you planning on buying a second home just for yourself, or are you planning on using as some sort of income property? Are you really going to be able to spend enough time there to make it worth it? Or do you have enough money that it doesn’t really matter?
You could use it for a timeshare home and have people help you pay the mortgage while keeping the equity. However, you won’t be able to use it all the time if it’s someone else’s turn to use the home. If you choose an income property, remember that you have to deal with renters right’s and possibly eviction if they don’t live up to the bargain. Weigh your options, and choose a home based on the purpose you feel is best for your second home purchase.
- Don’t Stress
A second home sounds like a fun idea at first, but remember this is going to be a long term investment property that is going to take years to bring a descent return on both your happiness and pocket book. If you’re the type that buys a gym membership and gives up after a week, you probably shouldn’t be buying another home. Be absolutely sure you can make the time to enjoy the property, otherwise it will just be another stress trigger in your life.
You’ll be thinking about how you should really go to your second home and never actually get there which will make you feel uneasy. Determine the home purpose, and be sure you can make that purpose useful for you and not a burden. A second home is supposed to be a luxury, not a stressful endeavor.
- Get Help
This is not the time to skimp by not hiring a Realtor. Your second home purchase should be well thought out. A local Realtor can help you stay updated on market conditions and they usually know about the best properties. Looking on the internet can only do so much. Interview a couple real estate agents and find one you can trust with your decision.
Look for vacation home specialists when buying a second home. Many popular vacation spots have Realtor’s who specialize in second home purchases. They deal with out-of-towners all the time and can make your transaction exceptionally smooth. Do you really have time to watch over every part of the transaction? Most likely not. Get a Realtor.
Financing And Closing Costs When Buying A Second Home
Obtaining financing for a second home can be just as easy as your first home. Stick to the people you know and talk to your first mortgage officer if you can. If you’re buying out of state, talk to your Realtor to get some recommendations. DON’T just pick a lender online and hope for the best. Your Realtor should have a few local lenders they trust and recommend, so take their advice.
Make sure they have in-house underwriting to ensure you can get a timely approval. If you have cash, forget this step and just make sure your money can be wired to the appropriate title company on the closing date.
Closing costs are going to be the typical fees with any other home purchase. There will be Realtor fees if you buy a home listed by an agent, title companies, document fees, property taxes, cost of any repairs, and lender fees.
Closing costs depend on the price of the home and average around $4,000 to $6,000 not counting the Realtor fees which are incorporated into the listing price. It’s quite common these days for the sellers of the property to assist with these costs, so be sure to ask for closing cost assistance in your initial offer.
That’s about it. Buying a second home is only as complicated as you make it. Once you decide on where you want to buy (the hardest part in my opinion) you should be able to work out all the details fairly quickly and have your second home closed within 90 days of submitting an offer. Be sure you pick a great location, be patient, and hire a Realtor who will do most of the leg work for you. Best of luck!
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