Kate Rushton Talks Second Homes
Many people know the advantages of a second home, whether it’s part of a retirement plan or as an investment opportunity for residual income. Although this knowledge may be widely known, many find themselves in a situation that may not end up as beneficial as they had originally hoped. It is crucial to be as prepared as possible when considering purchasing a second home, regardless of intent. One of our REALTORS®, Kate Rushton, is here to answer some of the most important questions to ask when considering a second home.
First and foremost, you need to consider how much this second home will cost, beyond the price tag. Take into consideration the mortgage, property taxes, utilities, maintenance fees, and insurance; keep in mind that up to 1.25 percent of the purchase price should be kept aside for annual maintenance and unexpected repairs. These factors are more than likely higher than you think, and most new buyers don’t realize that you need a twenty to twenty five percent down payment on a second home, so it’s always important to remain conscious of your finances and any unforeseeable complications that may require some heft from your bank account. With this in mind, remember that insurance for your second home may require twenty percent or more than what you pay for your primary residence. If you rent out your second home, you will need to acquire medical and liability coverage as well.
All of these financial factors lead to the question of whether you can realistically afford a second home. A general rule to follow is that no more than thirty six percent of your monthly gross income should account for all of your mortgage payments, this includes the second home, and any other debts you may have. Before investing in a second home, your finances should be expertly maintained, especially if you have college-bound kids; a second home greatly impacts FAFSA. After looking into your personal finances and taking college finances into consideration, if the numbers don’t add up, then now is probably not the right time to invest. It is better to wait and be financially secure and responsible than to jump into a venture that could leave your family monetarily struggling.
Due to the financial risk that inherently comes with buying a second home, determining whether or not you’re making this purchase for the right reason is key. Many people consider a second home as a way of saving money on accommodation fees when vacationing with family. However, the price you’ll pay for a second home can ultimately get you some luxurious vacations. Instead of viewing your second home purely as a place to vacation, consider it as an investment opportunity as your future retirement home or as a property that can be sold later to increase your retirement income. It is always a good idea to do your research, looking into median prices over the past ten years to determine the performance and trends of a property or area.
The reason for which you are purchasing a second home directly goes hand in hand with your plan for the home. If you are investing in this home for personal use, be sure that you find a home that caters to all of your personal wants and needs. There is more to be considered if you’re relying on rental income to cover the mortgage; be aware of location and what characteristics of the home are appealing to potential renters. Using your second home as an investment through renters also affects taxes, so speaking with a tax professional is crucial before you decide to purchase your second home.
If you decide that renting out your second home is the best decision for you, take into consideration the rental season, how often you would like to rent, and any regulations you may need to follow. Once you’ve looked into the rental market, calculate how much income your second home will create and if it will cover all expenses, including the mortgage, taxes, insurance, and marketing to make your property a success. This may also include the possibility that a property manager may be beneficial, especially if your primary residence is out of state. Property managers typically require twenty to thirty percent of the rental income, which may appear to be a large sum and not very appealing; however, with that twenty to thirty percent, they also take care of advertising, finding and screening tenants, contracts, cleaning, regular repair and maintenance, and deposits, all of which is incredibly time-consuming. Before purchasing a second home, interview various property management companies to find the best fit for you and your property.
Second homes can be an incredible asset to you and your family, whether as an investment opportunity or a future goal for retirement. These opportunities are luxuries, so take your time when deciding if a second home is right for you and remember to always check with your tax accountant first. If you have a property in mind or are just starting out on your venture, call our office to speak with an experienced real estate agent who can help you in your decision-making process. We’re here to help you live your best life.