If you’ve been driving around your neighborhood you’ve probably been noticing the “For Sale” signs popping up. This could be a good indicator of the recent rise in the housing market and may be a good time for you to pull the trigger on buying that second home.
For those of you that are considering this for the first time. Here are some factors to consider.
Reasons to buy a second home
There are a few questions to ask ourselves in regards to purchasing a second home. It’s important to understand the variables that go along with your reasoning as well. Here are a few general reasonings behind purchasing a second home:
Purchasing a rental
Many people decide to invest in a second property for renting purposes. Meaning, they buy a home in order to rent it out, and, ultimately make a profit. This option generally requires a different mortgage structure. The desirable factor here is using your rental to pay off the mortgage. If you want more information on preparing a rental home, check out this article.
Short term rental
The benefit of a short term rental is the tax regulations. In many cases, you don’t have to report rental income as long as the tenant stays less than 14 days. If the property is not rented out longer than 14 days the property still qualifies as a personal residence.
A vacation home is a good long term option when purchasing your second home. There are also tax benefits involved with vacation homes including deductible property tax, mortgage interest, insurance, and utilities. Even house amenities can be used as write off’s.
There are many benefits to purchasing a second property with retirement in mind. Generally, your debt history has stabilized and you are much more likely to get approved for a good mortgage plan. If you purchase it with good timing, usually about 10 years before retirement, you will have time to research the markets and make your decision when the conditions are in good standing.
Understand the local market
Knowing where you want to purchase your second home is half the battle when it comes to choosing a location. Every location has different local tax and property regulations. The history and fluctuations of the housing market is also important to research in order to gauge the direction the local market is heading. The best way to get this information and other important local factors is to find a real estate agent from the area with high reviews.
Know your insurance options
First of all, knowing the local geographical variables are essential when looking into insurance. If the location is near the ocean or has frequent earthquakes you’re going to want to include coverage into your insurance policy. Planning for this will help you understand the financial requirements of purchasing a house in that area.
There is also a concern from the insurance company’s perspective when offering a policy for a second home. If the purchaser plans on using this house as a vacation home or a home that will not be properly/frequently maintained, it increases the likelihood of property damage or hazards going unnoticed. This may increase the costs the insurance policy on your second home.
Know your mortgage requirements
Mortgage factors that affect qualification for a second home are generally the same as the first home. One new factor is if you have a mortgage on your first home that still has a balance and how much longer you have to pay it off. If you will be taking out a second mortgage, your down payment requirements may be higher than expected. This may have an effect on your interest rates as well.