The allure of purchasing a second home is strong throughout the United States. According to the National Association of Home Builders’ Eye on Housing Report for 2016, the total number of second homes in the U.S. was 7.4 million, representing nearly 5.6 percent of all housing for that same year.
An interesting fact the report reveals is that the bulk of these homes are located in very specific regions, with nearly all of them located on or near oceans, lakes, rivers, or mountain recreation areas. In fact, six of the top 10 counties with the highest numbers of second homes were located in Florida.
Before you dive in and begin the purchasing process for a second or vacation home for your family, it’s a good idea to ask a few questions and learn a few things, like those listed below.
How Do You Plan to Use Your Second Home?
There are a few ways people tend to use second homes. Each plan requires a different type of home and investment, as well as forethought, to go into the process. Among the more common uses for second homes, are the following:
- Investment Property
- Vacation Home (with or without supplemental rentals)
- Option for Shorter Commute
- Retirement Home
- Family Investment
Investment Home Purchase
There’s nothing wrong with purchasing a second home as an investment property. It is important, though, to understand the type of investment you’re planning to make. Buy and hold investments often require a longer commitment than fix and flip investment homes or instant flip properties. However, they also offer a steady stream of income over time to investors.
Renting homes can be quite lucrative, though, while creating income that will last for decades in many cases. The thing you need to know about this option, though, is whether the home is in a good location for rentals (college towns, high demand tourist areas, etc.). You also need to know what you can realistically expect from rentals in the area that are of similar size and condition to the home you intend to rent.
Vacation Home Purchase
Before you dive in to buy your first vacation home, take a little time to explore the area and ask a few questions. Learn about property values in the area. Find out if neighbors live in their homes full time, part-time, or even if they rent out to others. If many of your neighbors rent their home, at least part of the year, then there is substantial demand for vacation rentals in the area that can help offset some of the costs of your investment.
However, there are a few drawbacks to keep in mind when it comes to renting out your vacation home. These often relate to factors like property management costs, maintenance costs, and taxes on the rental income for the property. These can also affect the overall cost of your vacation rental.
The one good thing about owning a rental home is that, as the owner, you get first pick of the times when you want to use your property for family vacations or even a short getaway. Many people, however, prefer for their vacation homes to be their homes and their homes alone – or one that they only share with close friends and family. That is your prerogative as long as your budget allows, and your financing works out.
Family Investment Purchase
One thing many savvy parents of college-bound teens do is swoop into the college town and purchase a home near campus for their kids to call home while attending college. The cost often comes close to what parents would spend for a rental unit in or near campus, and they own the property once the educational cycle ends. It means they never need to worry about their teens having a roof while in college, and they have a property that can generate income until the next kid in the family enters college or the parent decides to sell.
Some parents make the additional decision to rent to other college kids while their kids are living there, which can make the home pay for itself within the first year in some cases.
Retirement Investment Purchase
One of the biggest reasons people purchase a second home is when making plans for retirement. People who make this decision have researched to make sure the place where they are investing is priced reasonably and presents many opportunities for their golden years when it comes to the following:
- Medical care access.
- Access to recreation.
- Location, location, location.
- Cultural attractions.
- Senior-friendly physical activities.
- Public transportation.
Also, look for areas that have plenty of family-friendly activities. At least, do so if you plan to have grandchildren visit often. These are the types of things that make a retirement destination a preferable choice over many others – even if you’re not yet thinking about all these things. They will, eventually, begin to weigh heavily on your mind when scoping out interesting retirement locations.
Investment in a Shorter Daily Commute
Another surprising reason people purchase second properties is to reduce their daily commute. This is common for people who work in large cities but live far enough away to require two or more hours of commute time daily. You can have more time with your family by staying in the city Monday-Thursday night and working late on those days to have Friday through Sunday with the family without the need to work hanging over your head.
As you can see, there are plenty of reasons to consider investing in a second or vacation home for people from all walks of life. Whether it’s a personal investment designed to improve your enjoyment of life or it’s largely a financial investment designed to help you reach certain financial goals, a second home can be an amazing investment when it is done right.
Investing Wisely When Buying a Vacation or Second Home
Once you know why you’re considering a second home, the next consideration becomes finding the right home, in the right location, for the right price. Of course, the first step in this process is to determine your budget for the property. You need to understand how much you can afford to pay each month toward your second home investment and how much money you can expect to put forward as a down payment for the purchase.
Lenders do exist who are perfectly willing to help people accomplish goals and dreams of investing in real estate for personal enjoyment or profit. The standards for many of these types of loans, however, are different in the eyes of many lenders. It is easier than in days past to get financing for a second or vacation home. However, the same programs that help people get low down payments on primary homes do not exist for those purchasing second homes. This means you’re likely going to need to have at least 20 if not 25 percent to place as a down payment on your new home. Be prepared for that expense out of the gate.
Additionally, you will need to perform the same due diligence (inspections, appraisals, etc.) on the second home as you did for the first. These important steps help to ensure that the home you are considering is worth the value you’re spending on it.
Ultimately, you want to buy with confidence that you’re purchasing a home that is closely valued to what you are paying for it.
Determine Real Costs of Ownership
It’s not enough to only consider the principal and interest of the home loan for your new home. You must also consider other costs that factor into how much it really costs to own the home. These include a few surprises as well as many things buyers forget about in their quest for a second or vacation home, such as:
- Tax implications. Will your taxes increase or reduce as a result of this new purchase? If so, how much? It’s often good to run your ideas by a tax professional to get proper advice before choosing to invest in a second or vacation property.
- Maintenance fees. More common in condos, maintenance fees can require substantial chunks of change each month that can place a home out of your financial reach when all is said and done.
- HOA fees. Many communities today have homeowner’s associations that require residents to pay fees toward the upkeep and beautification of the entire community. These must be accounted for when calculating costs.
- Will this investment diminish your retirement savings? If so, are you willing to make the sacrifice?
- Factor in the higher costs of borrowing for a second home as well, in terms of higher interest rates, higher down payments, stricter debt-to-income ratios, etc.
These questions help you find real answers to cost questions when determining the affordability of any home you are interested in purchasing for you and your family.
Once you know your limits on price, it’s time to begin exploring your financing options while beginning your search for the ideal property for your investment.
Financing a Second or Vacation Home
Financing second homes may seem more difficult at first glance. The truth is that there are many options available for funding a second home investment, including conventional loans, jumbo loans, and Fannie Mae and Freddie Mac loans. But, to secure the financing, you’re going to need to bring a few things to the table to get lenders on board. Those things include:
- Outstanding credit record.
- Sizable down payment.
- Savings indicative of financial stability.
- Favorable debt-to-income ratio.
With these things on your side, it will be almost impossible not to find financing for your second or vacation home. However, if you still struggle securing financing, don’t be afraid to consider outside of the box financing options as well. This includes things like private equity lenders, crowdfunding, and other financing options. The key is always to make sure that the terms are favorable for your needs and that you’re not risking more than the value of the home to get it.
Of course, all bets are off if you plan to use your second home as an investment property. Some of the resources available for financing a private residence for your family do not extend to investment or rental properties, so make sure you are honest with lenders about your intentions before digging too deep into the funding or financing process.
We want to help you get the financing you need for your second or vacation home. Contact us today to learn more about the many programs we have to offer and to see if one might be the perfect solution for your second or vacation home buying needs.