With mortgage rates hovering just above record lows and more and more people leaving the traditional work world for at-home employment and bootstrapped businesses, it's not hard to see why so many people today are looking for second (or even third) homes.
While buying a vacation home can be an incredible reward for all the hard work you’ve done, it doesn’t come without its complexities. Here are the top questions you need to ask if you are thinking about buying a second or third home this year. And best to act fast as mortgage rates may be rising.
1. Is the location suitable for me?
How close do you want your vacation home to be to your primary residence? Do you prefer to be within driving distance, like 70.9% of Americans? Or are you comfortable with flying between homes?
If your second home is far enough away to justify flying vs. driving, you might need to hire a property manager or caretaker to handle the property while you're not there. Doing so can save you the hassle and expense of "emergency travel" to fix a problem that a property manager could have taken care of for you.
Having a property manager will cost you, though. If you rent the property while you are away, a full-service property manager will typically cost you about 25% of the rent you charge. If you’re keeping the place empty, of course, you’ll have to pay those fees with no offset from rental income.
2. How will I use the home?
Are you planning to use the home to entertain guests or escape with a good book and a rare day of peace and quiet? Do you need access year-round, or could you rent the property during certain times of the year? Do you need “extras” like a hot tub, cabana, or pool to make your vacation home feel complete?
These factors will determine what you should look for, and taking the time to answer these questions can help you avoid buying a second home that doesn’t suit your needs.
3. Can you afford both properties?
A vacation home can be a dream until the expenses start piling up. You’ve probably already calculated the cost of maintaining two mortgages, but what about property taxes, homeowner's insurance, upgrades and repairs, homeowner's association fees, and all of the other expenses that go with owning a home? These costs will likely double or more when you take on a second property.
Also, keep in mind that your total debt for all properties you own shouldn’t be more than 36% of your gross income. A second home can be an investment, but you don’t want to be house poor either or take away from your saving goals.
If you feel buying a second home would benefit your overall financial plan after answering the above questions, we'd be happy to help you put the right strategy in place. We're here to help, so please give us a call today.