A second home brings with it much of the excitement of finding a first home, but the search is usually a lot more focused. This is because second homes are usually bought with a specific purpose in mind. Those in the market for buying a second house are likely to be searching either for an investment property or a vacation home. This distinction of purpose can have an impact on the factors that should be considered.
The factors that affect the decision to invest in a second home will be discussed under the following headings;
* Affordability
* Ability to meet expectations
* Maintenance
* Taxes
Can you afford it?
Lenders now require a minimum of 20% down payment whereas previously mortgage deals were closed on as little as 5% down or in some cases even awarding 100% financing. The increase in the need to have money down in order to close the deal may limit the price range you may be able to afford.
Of course there is also the matter of the monthly installment. If the second home is going to be used as a vacation spot without bringing in additional income, you must ensure that you will be able to meet the mortgage payments comfortably.
The rental on investment properties may be able to fully cover the mortgage payments but this should not be assumed. It is best to get the property appraised beforehand to ensure that the amount you would like to get in rent is actually realistic for the area and property type.
Will it meet your expectations?
Several factors come together to affect whether or not the property in question can meet your expectations. Whether it is to be used as a family getaway or an income generator, location is of primary concern. Renters like to know they are safe and close to important amenities like transportation, schools, hospitals and shopping. A good vacation home may call for a different set of specifications but the location is the central deciding factor.
Have you considered maintenance factors?
A vacation home especially is it is in another country or far from your primary residence may need to be maintained by an outsourced contractor. This is an additional cost that must be included in the annual cost of the property.
Investment properties also need to be maintained. This type of property may actually incur higher maintenance costs because it is actually in use year round. You may be able to claim certain damages caused by the tenant back from them and include this clause in your rental agreement, but generally the owner is responsible for most major maintenance costs. While these costs can be considered incidental to earning the rental income they must still be allocated in your overall budget analysis of the second property.
Increased Taxes
Rental income is taxable so you must allocate a provision for this in your personal income statement and be sure to deduct it in your calculations on the performance of the investment property. It is also possible to deduct any maintenance costs that you incur on the property that exceed your rental income. In the case of a vacation home, you are entitled to deduct the interest paid on your second mortgage in your calculations of personal taxes, while this is not allowed on rental properties. It is wise to have a good understanding of how your second property will affect your tax situation before you sign on the dotted line.
There are several issues to consider before committing to a second home. Examine the factors before hand to avoid getting in over your head.