vacation house

Investing in a Second Residence: Five Factors to Take Into Account

VWB Blog 3 years ago 5

There could be many reasons why people opt to buy a second residential property. Some do so to provide their families with a vacation or summer home. As for others, it gives them a chance to start a new lifestyle and have a secure retirement life. But apart from these, some buy a second home and use it to generate passive income.

Whether you’re planning to rent it out or use it as your vacation house, it’s critical not to jump into it without thinking everything through. Buying a second residence is a considerable investment. It would be best if you guaranteed that it’d not hurt your finances but instead improve them. Before you get excited about searching for your next property, ask yourself these questions first.

  1. Can you afford it?

Before purchasing a second property, you need first to ensure your finances must be in tip-top condition. If you still don’t have enough savings for emergencies and retirement, or you’re paying several high-interest debts, buying a new home isn’t the best idea. It can just hurt your expenses even more. Moreover, you’d want to first save up for the 3% closing costs and the 20% down payment of the new property. It would help if you also had at least 20% home equity in your primary residence. Mortgage companies will still look into your debt-to-income ratio to determine how well you can pay off the additional home loan. With that in mind, it’s recommended that you calculate your mortgage payments with your other debts personally. Ideally, they shouldn’t use more than 36% of your monthly income.

  1. How do you plan to use it?

This question will not be too critical if you’re just planning to use the second house for personal vacations. You have the liberty to buy whatever strikes your fancy. But if you’re thinking of renting it out full-time or occasionally, you’ll need a plan. After all, the income you will generate from the rent doesn’t matter to mortgage lenders. It’s still about your debt-to-income ratio or credit. That’s why a rental strategy is essential. If the income you’ll generate cannot offset the property’s monthly expenses, you’ll just be hurting your finances. On top of that, you’ll need to consider the type and features of the property if you want to attract tenants.

  1. Will it impact your taxes?

The third factor on our list is the tax implications of owning a second home. Different rules apply to operating a rental property or utilizing it for personal use. Consulting a tax professional can help you understand the steps to reporting rental income and other complexities of tax considerations related to your second home. Generally, investing in a rental property can provide you with tax and interest deductions. However, tax laws may cap certain deductions at $750,000. That means your second home loan won’t be eligible for interest deductions if your first one is already valued at that amount.

  1. Do you need a property manager?

Getting a property manager is particularly ideal if you plan to rent out your second house. Take time to think if paying someone to manage the property is worth it, or you want to do everything yourself. And by everything, we mean things such as screening tenants, regular repairs and maintenance, dealing with contracts, and attending to the renters’ requests. Most property owners begin by deciding to do the work themselves before realizing how much effort and time they need to spend. If you have a full-time job or another business and a family to take care of, then paying 20% to 30% of rental income to a property manager is not a bad deal.

  1. Is it truly a significant investment?

Let’s be honest; the value of residential properties isn’t guaranteed. The housing crisis proves the point. This means that if your reason for purchasing a second home is primarily for investment and building wealth, you’re on the wrong track. Residential real estate isn’t necessarily the best and safest investment. Don’t fall prey to the “constant” rising of real estate value. Plus, there are construction or maintenance costs to be taken into account. Talk to a real estate agent or financial expert to better understand the housing market and confirm if it’s a safe investment for your current financial situation.

Keep it real when answering these questions. It’s an excellent way to know if purchasing an additional home is a good financial move for you. If you’re still uncertain about it, we highly advise that you speak to a financial planner and real estate agent. They can give you professional and accurate advice depending on your specific situation and goals.

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