8 Questions To Ask Yourself Before Buying A Second Home

Nationwide, hundreds of thousands of people are jumping on the vacation-home bandwagon. In fact, sales of second properties were up almost 30% in 2013 from the previous year, according to the National Association of Realtors. But although buying a second home can be tremendously exciting, the decision also comes with its own unique financial considerations. So before you put an offer on that bungalow by the lake, consider asking yourself these eight key questions to make sure your head’s in the right
place.

1. How much will a second home cost?

We’re not just talking about the sale price here — there are a lot of associated expenses you need to factor into the equation too. So while that vacation house you’ve been eyeing may be small, it still requires budgeting for a mortgage, property taxes, insurance, utilities, and maintenance fees — and some of those expenses are probably higher than you think. When you’re not living in a home on a daily basis, you often don’t have the ability to tackle small problems before they become big ones —and that can translate into higher maintenance costs in the long run. Budget about 1% of the home’s purchase price for annual maintenance.

So if you bought a $300,000 home, set aside $3,000 a year for such common pop-up costs as an emergency plumbing repair or a new furnace.  If you have an older home that could present more issues or if you plan to rent it, aim for 1.25% to cover extra repairs. Also, don’t forget to factor insurance into the equation. In general, insuring a vacation home will cost about 20% more than a primary residence.

2. Can you really, truly afford a second home?

Buying a second home is a money decision — not just a fun way to spend your leisure time — and it’s one you shouldn’t make until after the
rest of your finances are in tip-top shape. Are you mostly debt-free? Are you saving enough for retirement? Do you have at least 20% equity in your primary residence, plus enough cash on hand for a 20% down payment and 3% closing costs for the vacation home? While mortgage approvals for second homes typically aren’t as stringent as they were a few years ago, lenders will still be looking closely at
your debt-to-income ratio, which is how much money you have to pay each month for debts like student loans, compared to what you take home. In general, you should be able to accommodate all of your mortgage payments (including the vacation home) and the rest of your debt using no more than 36% of your monthly gross income. If you can’t make those numbers work, this probably isn’t the right time to spring for a vacation manse.

3. Are you buying it for the right reason?

Some people may view a vacation home as a cost savings tool — they see it as a way to save on the lodging fees they’re paying every year when they take a trip. Another perspective? View it as an investment — either as a place where you plan to retire or a property that you can sell down the road to supplement your retirement income. When evaluating the investment property’s long-term potential, it’s important to research how prices have appreciated over time in the market where you’re buying.

4. How do you plan to use the home?

If you’re buying the house for your own personal use, you’re free to purchase whatever strikes your fancy — and disregard what might attract tenants. But if you’re counting on rental income to cover the mortgage, you have to be more conscious of the home’s location and appeal to others. Also keep in mind that very different tax rules apply, according to whether your second home is for personal use or if you rent it. Given the complexity of tax considerations and reporting rental income, make sure to consult with a tax professional before you make up your mind.

5. If you do rent the home, is it the right property?

The first step is to think about how often you’ll want to rent, plus how long the potential rental season will be. “On average, people who are actively renting are doing so about 15 weeks out of the year,” says Eric Horndahl of vacation rental site FlipKey.com. “And they report, on average, that they make approximately $26,000 per year doing so.”

After marketing costs, that’s enough to cover the mortgage, taxes, and insurance on the average $360,000 home — if you put 20% down, Horndahl adds. For some perspective, the median vacation home purchase price in 2013 was $168,700, and the median down payment was 30%, according to the NAR. While you’re vacation-home shopping, take a look at similar properties in your area on FlipKey.com or HomeAway.com to see how active the rental market is, and how other places are priced on a nightly or weekly basis. “This will help prospective rental owners make assumptions on how many nights or weeks they will rent it out for, and project their rental income,” Horndahl says. Next, consider how attractive the home will be to potential renters: Is it close to local attractions, such as the beach or a vibrant downtown? Does the property have any unique selling points or great amenities?
“When they’re going on vacation, people are looking for a hot tub or swimming pool,” Horndahl says. “Also, people who rent vacation homes tend to be larger groups, so you also want to make sure you’re taking size into account.”Bottom line: Make sure there are a few characteristics that will help your house stand out from others in the area, making it a top choice for renters.

6. Will you need to hire a property manager?

If you’ve decided renting makes sense, you need to determine whether you’re willing to do all the work yourself, or if you’ll pay someone to tackle it for you. And by work, we mean everything from advertising, finding and screening tenants, cleaning, handling contracts and deposits, and regular maintenance and repairs.  You should expect to pay 20% to 30% of your rental income for property management services. Many people start out thinking they’re going to do it all themselves  until they realize how much time they have to put into finding tenants and dealing with paper work. If you live within a reasonable driving distance of the home, you’re handy and you have the time, you may be able to do the property management yourself. It also helps if your vacation spot is a condo — where some of the maintenance is done for you as part of your association fees — or it’s a newer home, which may have fewer issues.

7. Is the home located in a risky area?

It’s one thing to buy a vacation home near the shore. It’s another to buy one in a region that’s regularly hit by hurricanes. Only you can decide if the location and potential rental income are worth the extra insurance costs, plus the hassle if your home is damaged. If you do decide to buy in a riskier area, it’s key to budget for higher — and sometimes unexpected — costs.

8. Are you rushing into the decision?

As with any large purchase, make sure you’re not buying a vacation home based purely on emotion or impulse. Research the area and sleep on any big decisions before you make them. In other words, take your time and find the type of property that you really want — and can afford. Then leap.

For complete article visit http://www.learnvest.com/2014/07/buying-a-second-home/#ixzz37dOas9ar

Photo Credit: Richard Elzey Creative Commons License

Mary Zohar, is a long-standing member of the Coldwell Banker North Tampa Office and an active member of the Greater Tampa Associates of Realtors. Besides having a Bachelor in Science from the University of Florida, she holds: Certified Home Marketing Specialist, Certified Negotiation Specialist, e-Pro, Short Sale and Foreclosure, and Accredited Buyer Representative and Certified Residential Specialist certifications; and received the International Diamond Society Award this past year. She also is the representative of the North Tampa office for Coldwell Banker CARES.  And is current in Continuing Education and licensure for the State of Florida. Having lived in the Tampa Bay area since 1981, makes her an expert in the  community at large. If she doesn't know what you're looking for, she surely knows who to ask or how to find out. Watching Tampa Bay grow, after these years makes her knowledge priceless. She can be reached at 813-417-6696, and is eager to assist you with all of your Real Estate needs.