As summer stretches on and mortgage rates hit record lows, vacationers and would-be travelers staying put may find themselves daydreaming about what it would take to turn their favorite mountain, beach or lake home into a permanent family retreat.
Of course, buying a second property could have a major impact on your finances. Before taking the plunge, ask yourself the following questions:
- Who will use it? Will a second home be solely for your use, or do you plan to rent it out? Renting can defray costs, but don’t underestimate the time, hassle and expense of being a landlord. The need to hire a local property manager or professional cleaning staff can put a serious dent in the profits from any rental income. Plus, tax laws are different for rentals than they are for properties used solely as second homes. How will you account for your new property on your tax returns?
- How will I pay for it? We generally advise clients to pay off the mortgage on their primary home before buying a second property, even if they plan on renting it out. As the pandemic made clear, demand for vacation rentals can be unpredictable, so a second home purchase can be risky if you’re relying on rental income to make the numbers work.
- Do I understand the total costs? A second property will add a slew of new fixed expenses to your budget—you’ll want to have solid estimates of property taxes, insurance payments, mortgage payments, maintenance costs and utilities when considering a purchase. It’s also wise to create a rainy-day fund for unexpected expenses that pop up.
- Have I priced other options? How many weekends and vacation days will you realistically be able to spend in your new place? Compare ownership costs with prices for a similar rental in the area. Continuing to rent may prove a more affordable, flexible and less stressful alternative.
- Can I still meet my financial goals? Don’t let a second home derail your progress toward other long-term goals, like paying for college or retirement.
If you’re considering a second home and have questions about the numbers, we would be happy to help you do the math and think through your options. Let us know!