For many people, owning a home is a lifelong dream. For others, owning a second home can be just as important. There are a variety of reasons people have for purchasing a second home—as a family getaway, as a transition into retirement, or as an investment property for added financial security. Whatever your reasons, it’s important to understand a bit about the process as you begin your search.
Financing a second home
In many ways, financing for your second home works the same as financing for your primary home. Homeowners can have up to four homes financed through conventional mortgages, so you may want to reach out to your current lender in order to see what options they have available. In some cases, you have to provide a larger down payment for a second property, and your lender may also require a somewhat higher credit score.
If you have a great deal of equity in your current home, you may be able to tap into it through a home equity loan or a home equity line of credit (HELOC) in order to put together the funds you need to buy your second home. Talk with your lender about how this will affect your credit and your underwriting process.
If you decide to split the cost of your second home with trusted friends or family members, you will want to enlist the help of an experienced real estate attorney. He or she will create an agreement to designate how the home’s ownership will be structured in order to ensure that all of the property owners are protected in the event that one of them experiences an unforeseen illness, job loss, or financial reversal.
Property management for a second home
Whether your second home is around the corner or across the country, it can become difficult to manage. This is especially true if you are using your second home as a rental property, since you will have to take on the responsibility of finding and screening renters, maintaining the home, and making any needed repairs. In order to simplify second homeownership, you may want to enlist the services of a property management company.
If you are using your second home as an investment property, your property manager can take on all of the day-to-day landlord tasks that you either don’t want to do or don’t have time to do. They can set up systems and processes for collecting rent and fielding inquiries from tenants.
If you are using your second home as a vacation home, a property manager can still be a great idea. This is especially true if your second home is located in a market that is far away from your primary home. A property manager can shovel snow, cut grass, or pick up debris from a recent storm. In addition, some home management companies that focus primarily on the vacation home market offer amenities like grocery delivery, maid services, and other value-added options that make it a pleasure, rather than a chore, to stay at your property.
These types of services can be especially helpful if you share your vacation property with friends, family members, or co-owners. By ensuring that upkeep, maintenance, and cleaning services are completed on a regular basis and in a consistent way, you’ll experience less conflict and frustration.
Investment options for a second home
If you’re buying your second home primarily as an investment vehicle, it is important to talk with your attorney and your tax adviser. Owning an investment property can have both benefits and drawbacks, so make sure that you know how your investment will affect your particular financial situation.
Short-term rentals include those conducted through local rental companies or through online platforms like Airbnb and VRBO. Rentals may be as short as overnight or you may require a longer stay of weeks or even months. Short-term rentals are especially popular in resort areas, coastal areas, or in areas with a large number of tourists.
One of the advantages of short-term rentals is that you can reserve the use of your home for part of the year in order to host friends and family or for your own vacations. This offers you the best of both a vacation home and a rental investment. It may be wise to consider reserving your second home for personal travel during the off-season, in order to maximize your return on investment.
In some neighborhoods with strict Homeowners Associations, buildings with strict co-op boards or condominium associations, and even in some cities and counties, you may be unable to rent out your investment property for short-term stays. Check to ensure that there is no pending legislation in the local municipality and that there are no HOA, condo, or co-op regulations currently in place.
Long-term real estate investment—sometimes called a buy-and-hold investment strategy—involves longer leases, generally of a year or more. You may choose, for example, to purchase your retirement home at today’s rates, then use a few years of rental income to offset its cost and pay down the mortgage. Alternatively, you may buy a nearby home, rent it out, use the income to cover the mortgage, then collect additional income once the property is paid off.
Real estate investment can offer a number of tax advantages, both when you file each year and when your heirs inherit your investment properties. As always, it is a good idea for you to consult with your attorney and your financial advisor to find out if a long-term real estate investment strategy is a good choice to help you meet your financial goals.
If you are considering buying a second home, whether in town or in a distant real estate market, begin the conversation with your trusted real estate professional.