Despite the common perception to the contrary, buying a second home isn’t only for the wealthy. Sometimes people buy a second home when they haven’t had success selling the first one, or for a vacation retreat, or to buy, fix up and sell at a profit, or to rent out. Two homes might be a great investment for the right person. But for the wrong homeowner, owning two homes could be a recipe for disaster.
If you’re thinking about buying a second home for practical, pleasurable or profitable reasons, take the time to think through the decision. Here are some things to consider before taking out that second mortgage.
- Do you have the financial resources? You don’t have to be in the wealthy category, but underwriters do look to make sure you have at least 6 months worth of payments in reserve at the bank before they approve the loan. And, as a general rule, you will have to make a higher down payment on a second home than the first.
- Is your debt ratio low? You’re taking on more debt when you take on a second home. Lenders look to make sure your debt-to-income ratio is low. Usually lenders look to see if your debt ratio is 36 to 42 percent or lower. This includes car loans, student loans, credit card debt and your existing mortgage.
- Do you have enough operating money? Remember your monthly mortgage interest rate may be higher. You will need to maintain both homes. You’ll have two roofs to replace, two homes to paint and twice as many appliances that may need fixing or replacing. And don’t forget about insurance and taxes on both places.
- Are you in for the long haul? Too often people have the idea they will be able to turn a property over fairly quickly, which does not always happen, especially in this housing market. Be prepared to invest in the property for 6 months or even longer, even if you are planning to rent the property out.
- Are you buying your second home for the right reason? Some people think of a vacation home as a way to save money on the hotel fees they generally pay when they go on vacation. The truth is that, for the amount you will spend on a vacation home, you could take a lot of nice trips each year and stay in nice hotels. It’s much better to think of a vacation home as a long-term investment property. Take the time to research how prices have appreciated over time in the market where you’re buying to make sure you are making a sound decision.
- Is this the right property for you? The average vacation homeowner rents out their property 15 weeks out of the year. While you’re vacation home shopping, research similar properties in the area to determine how active the rental market is or if vacation rentals are being rented on a nightly or weekly basis. Will this property be attractive to vacation renters? How does the location or local attraction help make the property attractive to renters or buyers?
- Will you need to hire a property manager? Too often home buyers forget to factor in the cost of hiring someone to manage the property. Having a property manager can make sense as many will help with advertising, finding and screening tenants, cleaning, handling contracts and deposits, and regular maintenance and repairs. Sometimes it makes sense to pay someone else to handle things for you to free up your time to do the things you love and want to do.
- Is the home located in a high-risk area? It’s one thing to buy a vacation home near the beach. It’s another thing to buy one in an area that is prone to hurricanes or tornadoes. If the home you are considering is in a flood zone or prone to other natural disasters, it may not be a good investment.
As with any large purchase, you should make sure you’re not buying a vacation home purely on impulse. Take the time to do your research and really decide if owning a second home is the right investment for you and your family. For information on protecting your home(s), contact us.