A second home can be an excellent investment as well as a source of supplemental income. If you are thinking about buying a second home, here are some questions to consider.
What are the advantages of purchasing a second home?
How do I know if I can afford two mortgages?
What are the expenses of owning a second home?
How do investment properties differ from second homes?
How can I find the right investment property?
Advantages of Second Homes
Financing of a second home typically carries an interest rate similar to that of a primary residence. This means you can take advantage of the current low-interest rates when purchasing a second piece of property. If your second home happens to be in a place you like to visit, you can potentially write off trips or vacations. Of course, whenever you are not using the second home yourself, you can rent it out on a short-term or long-term basis. The rental income will offset property expenses.
Financing a Second Home
The requirements for financing a second home are stricter than they are for a primary or investment property. What does that mean? It means the lender will ensure that you are qualified to make all payments (including taxes, insurance, principal, and interest) on both properties without considering any potential rental income. In order to qualify, your total housing expenses must be under 45% of your gross income.
Costs of Owning a Second Home
Additional expenses will depend on the type of second home you purchase. A condo, high rise, or townhome may have HOA fees. If you are renting out the property on a short-term basis, there may be management fees, cleaning fees, utility costs, and maintenance expenses.
Second Homes Versus Investment Properties
If you qualify for a second home mortgage, the interest rates will be reasonable. If you are purchasing the property strictly as an investment, plan to pay about .5% higher than the market rate. For example, a mortgage on a second home today is close to 4%. An investment loan interest rate will be around 4.5%.
Finding the Right Investment Property
Before you begin your search, be crystal clear on what your goals are. Are you looking to maximize your potential income? Are you interested in a property that is expected to appreciate? Prior to purchasing, research the area. Look into rental comps, which will give you information about the local rental market. Make sure you know the local rental laws. Finally, avoid buying a property in an area you have not visited or don't plan to visit. Why? If you don't check on the property at least once a year, you won’t know if your asset is being properly cared for.
Remember, real estate can be a key to wealth. The right choice can fund your retirement while someone else pays off a property you own.