Buying a Second Home: The 3 Biggest Factors to Consider
There are generally two reasons to buy a second home. The first reason is to have a vacation retreat for the family, such as a cottage or beach house. The second reason is an investment property, something to rent out and bring in some extra income. It’s most common for people to use their second property for both a vacation retreat and something to rent out when it’s not in use. For the purpose of this article, we will focus on this scenario.
When considering a second home, there are many factors to assess. Depending on which state you live in, there are tax implications. It can be more expensive than buying your first home.
It’s not a decision that should be taken lightly. Every factor should be thoroughly considered before pulling the trigger. This guide will outline 3 major factors.
1.Time is on your side
The pressure associated with buying a second home is vastly different from buying a first home. When buying a primary residence there is a certain urgency and timeline that needs to be met. If you can’t time your purchase well, you may end up having to rent a home or temporarily moving in with your in-laws (Yikes). You could also get stuck overpaying; the market doesn’t care what stage of life you’re in.
When buying a second home as a retreat, people tend to be excited and want to make their dream getaway a reality as soon as possible. Allowing yourself to fall into this trap is a big mistake. Take your time and properly assess the market. Only buy if the market is on a downtrend. At the end of the day, this is a second home. You’re not on any deadlines. Use the time to your advantage.
When renting out your vacation home, you only have to claim it to the IRS if you rent it out 15 or more days per year. If you stay under the 15-day threshold, it doesn’t matter how much you charge, all that money goes into your pocket. However, you don’t get any of the associated tax breaks that come with owning a rental property.
Ideally, you would rent your property as much as possible; what could be better than having your home pay for itself? Here are some of the main deductions you can claim as a landlord:
– Mortgage Interest
– Insurance Premiums
– Legal Fees
– Cleaning and Maintenance
– Commissions paid to rental agents
It is very important to assess the exact way you plan on using your property and consult with an accountant who can help you navigate through the taxation process.
3. Make sure you can afford it comfortably
After educating yourself on all the real costs of owning a second home, such as taxes and the state of the market, it’s time to determine if you can afford it. The last thing you want to do is rush into a second home.
At the end of the day, it’s a luxury. If you are even looking into it, it generally means you are very comfortable with your current expenses. The biggest mistake you can make is to sacrifice that peace of mind.
Interested in the benefits of buying a home vs. renting a home? This article shares some insight on buying vs. renting a home.