Before purchasing multiple homes as investments or vacation homes, keep the following in mind.
Do you want to become a snowbird and buy one of the many homes for sale in Boca Raton? Or would you rather invest in some Aspen real estate and have a go-to cabin for all your skiing and mountain-exploring adventures? Buying a second or third home means you’ve arrived in a good financial place where you can finally invest in that getaway of your dreams.
But before you take the plunge, you’ll need to carefully consider the decision and ensure you have all the pertinent information to need to make a smart purchase. Here’s what to know before you buy.
Carefully Identify Your Budget
Considering the full financial impact of buying a second or third home helps you decide what you can spend on a home (or if you can actually afford that second home at all.) When analyzing your budget, make sure you include every expense that comes with buying a second home. Not only will you have another mortgage, but you’ll also have extra taxes to pay, a second set of utility bills, possible HOA fees, yard maintenance, and more possible costs if repairs need to be made. If you plan to rent the home out, you may also need the help of a property management company or, at the very least, a company to come clean the house after guests leave.
Before deciding to look at homes for sale in Boca Raton or the Hamptons, take a look at your entire financial picture. Do you already:
- Have your current home paid off?
- Have six to nine months of emergency cash saved?
- Save 15% or more of your current income?
- Established a college fund for your kids?
- Have all your credit cards paid off?
If you answered yes to the above questions and have determined you can afford all the costs that come with purchasing and maintaining a second home, your search can begin.
Know What You’ll Use the Home For
Make sure you and your spouse both understand your expectations for the home. If you plan to use it as a vacation home, do you both realize your flexibility to travel to other locations may be limited after making the purchase? If it’s an investment property, do you understand everything that will go into maintaining it and dealing with guest issues? Too many people get caught up in the excitement of looking at condos in Las Vegas or homes for sale in Scottsdale and don’t stop to think the entire process through. Take the time to talk with your spouse or any other people involved in the purchase and identify your objectives for buying the house and what that will mean for your lifestyle before you get too far into the buying journey.
Fully Understand the Tax Situation
According to the IRS, a second home must be classified as either a rental property or a personal residence. If you designate it as a personal residence, you will be limited to renting it out 14 days or fewer each year. If you designate it as a rental property, you can’t claim the mortgage interest as a tax deduction, but you can claim losses on the rental if your rental income is less than what you spend. Also keep in mind that even if you do designate it as a residence, you can only deduct interest paid on a mortgage of $750,000 and less. The amount includes the totals of all homes you own and designate as residences.
Choose the Location Carefully
The location of your second home is one of the most important considerations in the entire process. If you’re purchasing the home as a vacation spot, is it far enough away to feel like you’re getting away from home? Does it have plenty of amenities? Is it easy to get to via plane or driving? If you plan to have your kids or other family members visit, will they be able to get to the home easily?
Also consider the weather and traffic year-round. You may want to look for homes for sale in Boca Raton because you’ve been there a few times in the fall and it was beautiful but don’t realize how hot and muggy the summers can be. You may also be unaware that the quiet beach community you fell in love with over the winter becomes a madhouse when the summer hits. It makes sense to visit the area where you plan to buy a second home multiple times during the year before you decide to buy.
If you’re buying the home as an investment property, make sure it’s easy for guests to access and that it has attractive amenities to draw them in. You may also want to purchase in a neighborhood where there are other rentals, so your guests feel comfortable and not like they’re intruding on a well-established neighborhood.
How You’ll Pay for It
There are some limitations when it comes to financing a second home. For example, you cannot use a VA or FHA loan to buy a second or third property. You can use a jumbo loan or a conventional loan, or you could do a cash-out refinance or reverse mortgage on your current home. It’s important to talk with a mortgage lender about your options before you settle on the vacation home of your dreams. You can get prequalified for your lending option of choice and know how much you can borrow before you begin narrowing down which piece of Hamptons real estate or Scottsdale property you want to buy.
Working with a professional real estate agent who has experience helping clients buy second or third homes as either vacation homes or investment properties is the best decision you can make when looking at possibilities. He or she can guide you in the right direction, help you settle on a location, and choose a home that will fit all your needs.