Owning your home is a smart way to build equity and create more stability in your life. But what about buying a second home? Does it offer the same advantages for buyers?
A second home can be a great way to put down roots in your favorite vacation spot or start a real estate investment portfolio. This is particularly attractive for buyers in their early fifties to late sixties. You likely have solid credit, a decent job, and you may have recently paid off your first mortgage. Plus, the kids are probably out of the house and finished with college. With their own independent lives beginning, it frees you up to spend weeks at your getaway in Delray Beach.
Before you take on a second mortgage or tie up a large sum of cash, though, ask yourself the following questions.
Are you in a good financial place?
One of the most important considerations for a second home is your monetary situation. If you cannot afford a vacation property, it doesn’t matter how much you love the area. Taking on too much financial responsibility will just add stress and risk to your life.
To know whether or not you are in a good place to buy a new home, consider the following:
Do you have disposable income?
Having plenty of extra money each month (after taxes, living expenses, and savings) is a good sign that you would be comfortable taking on the responsibility of a second or third home. If you are currently carrying large credit card balances or student loans, you might want to knock those out before investing in a second mortgage.
What are the tax implications?
While there are many incentives for homebuyers in the United States, many of these are reserved for the primary home. The tax burden of an additional property shouldn’t prohibit you from buying another property, but you should consult with your tax professional to know what you might expect. This is especially true if you are buying the additional property as an investment.
How will you pay?
If you can set aside enough cash to pay for your second home without needing a mortgage, you can save yourself a considerable amount of money. It will also make the closing process easier and position you as a more attractive buyer, which can be a great benefit in a competitive market like the one we have in South Florida at the moment.
If you are financing, you’ll want to consider mortgage rates, how much of a down payment you can afford, and whether or not you are comfortable taking on a new mortgage. Luckily, we are still near historically low interest rates. These continue to inch up over time, though, so it is currently a great time to buy.
Will a second home affect your retirement?
Although a second property can serve as an investment, you don’t want to borrow from your current retirement plans to pay for it. And even if that second home is a good buy, if the expense means extra work – and no time to visit the property – then its value may be negligible.
Do you have sufficient extra cash available?
In addition to your down payment, you’ll need to cover closing costs and other expenses associated with buying a new home. A second home often requires more furnishing from scratch since you likely won’t be moving your current furniture into it. You might also want to redecorate or otherwise renovate the new space. So be sure to include those expenses in your calculations.
Once you’ve got the financial details worked out, you’ll want to think about the where and the why of your second home.
How well do you know the area?
It’s easy to fall in love with a place when you’re on vacation. It happens in South Florida every winter as our colder neighbors seek warmer weather. But renting a house or condo for a few weeks at a time is a different commitment than making a home purchase.
When you’re considering a second home, you’ll want to visit the location multiple times throughout the year to see if you enjoy it as much in the summer as you do in the winter. It might not have the same appeal in every season, but you should at least be able to see yourself there at other than peak times.
If not, you might be better off just renting vacation properties. You should also consider if this is a location you will want to visit often for years to come. After all, if you plan to visit for only a few weeks here and there, it might not be worth the hassle of purchasing and maintaining an entirely separate property.
Think about sharing a property with friends or family.
One way to bridge that gap is to consider owning and using the property with friends or family. Timeshares are not generally a good investment, but it might make sense to co-own a property to offset some of the cost of buying and maintaining a second home. Just be sure everyone is clear on expectations and responsibilities. Good contracts make good neighbors.
Is your second home for business or pleasure?
South Florida is an excellent area for vacation homes. But its many attractions also make it a great location for owning a rental.
Consider whether you want the second home as a place to enjoy yourself or to diversify your investments. Both are valid reasons, but you’ll look for different attributes depending on how you plan to use the property.
For example, if you can’t imagine having a vacation home without a jacuzzi tub, then you should include that on your list. But only if it’s a property you plan to use yourself. If not, the restriction might not make as much sense if you are trying to keep your costs down for a rental investment.
Note that this is not an either/or decision. You can plan to stay at the home some of the time and use it as a vacation rental when you aren’t there. Just be sure that you’re comfortable with the idea of strangers living in your home when you’re out of town.
Also, you’ll want to be confident that you are interested in being a landowner before you commit to renting it out. A property management company can help you with rentals, maintenance, and dealing with tenants, but that will eat into your profit.
There are lots of good reasons to purchase a second home in South Florida. It’s a place you’ll want to vacation, and there is plenty of potential for investors.
In order to ensure that you’re making the best decision for yourself, you’ll want to speak with a trusted and experienced real estate professional who knows South Florida well. If you’re considering a second home purchase, contact the Jablon Team today.
Marc Jablon, the Jablon Team
New Harbor Realty