How To Buy Your Second Home

You are getting sick of the New England winter weather and are seeking refuge in a vacation home down South.  You are an avid skier looking to make a secondary purchase in Colorado's snowy mountains.  Or maybe you are looking to buy another home in your town for rental purposes.  Whatever the case, buying a second home can be an exciting prospect as long as you are prepared for the financial commitment and all the other nuances attached to dual ownership. 

  1. Vacation home or rental property?  Decide whether you can afford to have a second home as a place where you (and possibly your family or friends) can gather when it is convenient, or whether you are interested in renting it out for part of the year for income. Many people find that supplementing their income with rent is a great way of making mortgage payments. 
  2. Location.  Where do you want to spend your time when you are away from your primary residence?  Examine the area of interest with a discriminating eye.  Look at tax rates, crime rates, and talk to locals about what they see as the pros and cons of the town, city, or region.  For crime information take a trip to the local police station. You can find most crime stats and town/city information online. The information you garnish here will help you determine first, if you want to spend time here, and second, if the location has good renting and/or resale capability.  
  3. Water, water everywhere.  Many second homes are coastal or near the water. Know the history and the lay of the land.  If you are thinking of making a purchase on the water, make sure you know if the region experiences flooding and explore insurance options if this is the case. 
  4. Property manager.  It is a good idea to invest in a property manager. This person will take care of your investment while you are away.  He can do a range of duties--from checking on the house weekly to performing routine maintenance--and in some instances if he is a contractor, performing construction or renovations to the unit.  If you cannot find or do not wish to pay for a property manager, at least have a friend or relative routinely check on the property.  If you cannot afford to pay someone to watch your second home, you may not be making a wise purchase. 
  5. Size matters.  Consider the costs of a small home or condo versus a larger home.  Factor in utility bills and potential maintenance and repair issues that may arise over the course of ownership. Sometimes smaller is better. 
  6. Fire escape plan: Plan for the worst.  Find a real estate agent who knows the rental market. Inquire about rents in the area and have a look at some of the units on the market for comparison. Even if you think you will not need to rent your home out, plan for the worst.  The place where you buy your second home will, ideally, have a very strong rental track record.  Since you cannot predict tax hikes, your employment security, and your health, always, always, plan for the worst scenario--that is, you having to rent your house out year-round.   
  7. Finances.  Shop around for mortgage rates and lenders.  Lenders are usually a little more conservative for loans on second homes, so be prepared.  A mortgage officer may suggest to you to take out a line of equity on your home for the purchase, or he will do a traditional loan. It is highly dependent on your financial situation and the type of property you are seeking.  Lenders can be hesitant to produce a loan based on renting the home out.  If you are not having luck with mortgage brokers, try your local bank, or at least go with the company that you have your first mortgage with (since they know your payment history). 
  8. Do not overpay. This is especially pertinent to the second home, since you, presumably, will be carrying a mortgage on the first home.  Psychologically if you overpay for your second home, you may experience "buyer's remorse," and the value of the home--to you--can go down immeasurably.  Remember, you want to enjoy this new purchase; it should not be an albatross around your neck. 
  9. Other option: Time-shares.  If you are unsure about your ability to meet the financial commitment that a second house entails, you may want to explore the time-share option. In this option, you can purchase a week or as many as several weeks/months at a certain destination.  Although each time-share company is different, most allow for trades, meaning you can trade your week/month with another party in a different location. You pay a yearly fee (for maintenance of premises, etc.) but have no direct responsibly for repair or construction.  You probably won't make a killing for resale with the time-share, but it may be a safer option for you to explore.

Whatever function your secondary home will fulfill--rental or a private getaway--it is important to understand the possible pitfalls associated with owning two places.  Remember not to stretch yourself too thin on a purchase and keep in mind that a secondary home can be an investment, but can be a thorn in your side if you are not careful. If you are careful, and choose a location and unit in a desirable location with good rental and resale value, on the other hand, you may be making the best investment of your life! Enjoy.


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