September 14, 2022

Buying a Second Home as an Escape Place

People have various reasons for buying a second home. Some want to arrange a place to relax, someone wants to earn money by renting out rooms, someone wants to spend their retirement years there in peace. If you have such intentions, then you should weigh the pros and cons before taking out a mortgage.

Is it worth buying a second home

  • Check out the prices. Are houses expensive or cheap now? Try to find out the average family income and real estate prices in the city where you are going to buy a house, then compare the coefficient with other cities. Be ready that in cities such as New York and San Francisco, the price of real estate is traditionally very high.
  • Talk to a real estate agent or several agents about the relative price of houses. Even if you do not get a definitive answer (it is difficult to assess whether the housing market is cheap or expensive, since the information is not always accurate), you will be able to find your way to specific markets, or even find out which houses are more profitable to buy. This is very valuable information.
  • Let's assume that you won't be able to rent out your second home. Are you sure this is a good investment idea? If not, then you should think seriously before buying. Many families buy a second home, confident that they will be able to rent it out while no one lives in it. But when it is unprofitable or impossible to rent it out, they lose a very considerable amount.
  • Make a list of possible expenses. Add up all the probable expenses and estimate whether your budget will be able to cover them? Of course, a second home is good, but you should not invest most of your funds in it until you have repaid the loan for the first house. Here are some possible costs:

Property taxes. They depend on the state of your residence; the average annual property tax in Los Angeles is $ 1,300 from a house worth 100 thousand or 1.3%. If your hometown has a very high property tax, then we advise you to think about buying a property somewhere in the neighborhood. This way you will save a lot of money.

Utilities. If you don't live in the house most of the time, the payment for them will be significantly lower.

Keeping the second house in decent condition. The house is like a living being - it grows, ages, needs repair. Regularly carry out repairs and landscaping of the surrounding area. The garden and yard should be well cleaned, even if there are no residents there most of the year. In the summer months, the grass overgrown with weeds indicates that there is no one in the house. Untidy snow on the paths in winter can provoke vandalism or theft.

Increase in the amount of insurance. This is due to the fact that the house is rented or vacant most of the year.

Real estate management company services. A real estate management company is especially useful if you decide to buy a house far from your main place of residence. If you rent a house, it would be nice if someone would look after it just in case of fire. Ask someone to check if the pipes or roof are leaking while you are away.

Why buy a second home?

You won't necessarily get the same benefits you got when you bought your first home. Check out the Internal Revenue Service (IRS) rules to find out what taxes the second home will be subject to. It usually costs more, especially if you don't rent it out, but live there yourself.

For example, if you rent a house for less than 14 days, then you do not need to declare income. And if you live in a house for less than 14 days a year, then this will already be considered a business and you will have to pay 25 thousand dollars.

Consult with a CPA or tax advisor before making a purchase. A tax consultant will give you accurate, up-to-date information about tax write-offs, loans, interest rates, etc. For example, you are probably counting on a more expensive mortgage with a higher interest rate, regardless of your credit history - a second home will usually cost more.

Buying Second Home Plan

Are there any good schools nearby?

Are there many types of transport?

How many shops are nearby?

Is there a hospital in the neighborhood, as well as a police and fire station?

1. Before buying, it is better to rent a house for a while to check. This is one of the most common mistakes when people buy a house without even thinking about whether it is good to live there. Even if you are planning to rent out your second home, you need to make sure that it is comfortable there.

2.Talk to the locals. Find out what they think about this area, how long they have lived there, etc. Future neighbors can give very useful advice. With the help of such acquaintances, you will be able to understand whether this is a profitable investment of your funds. 

You yourself will have the opportunity to feel like one of the old-timers (while you rent a house there) and collect such necessary information as:

Are there any good schools nearby?
Are there many types of transport?
How many shops are nearby?
Is there a hospital in the neighborhood, as well as a police and fire station?

3. Crime rate. 

4. Find out what housing prices are in the area. Comparable house prices should give you a good idea of how expensive the average house in the area is. You can contact real estate agents directly to get estimated data. The most important thing here is to look at the sign for sale, and not at the prices in the ads. Use these numbers as a rough guide; the fact that a 4-bedroom, 3-bathroom house sold for $575,000 doesn't mean anything.

5. Start familiarizing yourself with the responsibilities of a homeowner if you are going to rent a house. If you want to use your second home for rent and increase your equity, you need to know what to do. Don't be negligent – it can cost you money. Here are some tips for a novice landlord:

  • Find out how to evict a tenant or terminate a lease.
  • Study the laws of your state on security deposits, what they cover – cleaning, unpaid rent, damage, and what they don't - maintenance, damage; what they can be used for (modernization).
  • You should know how to draw up a contract of employment. Laws against discrimination oblige you to follow the protocol.
  • Do not forget that you have regular repairs and maintenance on your shoulders.
  • Remember about the measures of protection against liability for injuries of the tenant. You are responsible for the accident that happened to him, if you knew about it and could prevent it in a timely manner.
  • Read the list of tenant's rights, especially with regard to privacy. In most states before repair work (except in emergency cases) you must notify him within 24 hours.

6. Find a real estate agent. A good real estate agent with at least 5 years of experience will be very useful throughout the whole process of buying a second house. The agent will help you find the right option among the many offers. A good agent will keep in touch with you after the purchase. This is very convenient for homeowners whose main residence is far from the new house.

Before Buying a Second Home

Make sure that you have enough funds before buying. Getting a mortgage loan will let you know how much you can count on.

Most likely, you will have to pay a high interest rate, and therefore qualify for a smaller option. When you have money on hand, then start saving for the initial payment.

Before giving you a second mortgage, lenders will look at your debt-to-income ratio (DTI), which should be less than 36%.This means that your total debts, including the first mortgage loan, should meet a third of your monthly income. For example, a homeowner who earns $7,000 a month and gives away 2,500 has a DTI ratio of 35%.

Be prepared to make a deposit of 20% of the purchase price. It can be your personal savings or shares. You can also borrow funds secured by an insurance policy or a pension fund.

It does not hurt to make friends with the local precinct and neighbors in the area where your second home is located, especially if you are often not at home. If the neighbors know you, then there is a high probability that they will inform you if they notice something suspicious. Contact real estate agents in the area where you plan to buy a house – they will tell you about the rented property in this area. Also, do not forget to inquire about the economic situation of the area, as this greatly affects prices.