The day has finally come. You are in a great position to buy a second home, and you are ready to find your dream vacation house in the mountains, the beach, or the big city. Buying a second home is not the same procedure or experience as buying a new house. Here are six key things you should consider when you are buying a second home, so you are prepared to make the process smooth and simple.
The financial impact
Many costs go into getting a second property other than just the payment on the house. Furnishings, utilities, HOA fees, upkeep, and maintenance are all expenses that you expect. Double the home equals double everything else, including electricity, taxes, bills, and emergencies. There are also the costs involved with maintaining the home while you are not using it. You may decide to rent the property when not in use to offset some of the expenses and provide a new revenue stream to your finances. There can be tax benefits to owning a second home, which vary by state. Be sure to talk with your accountant to take advantage of any tax benefits.
The second mortgage
When buying a second home, you have more financing options available to you than you did for your first home. You can take out a second home mortgage, you can take a home equity loan on the home you already own, you could use a home equity line of credit (HELOC), or you could go with a cash-out refinance.
A HELOC and a home equity loan use the equity in your current home as collateral, either with a credit line used over time or as a lump sum. If you decide on a loan, you pay a fixed interest rate on the money you receive immediately. If you decide on HELOC, the rates are variable and can be used for an assortment of expenses over a period of time. On the other hand, a cash-out refinance replaces your current mortgage with a bigger mortgage, allowing you to access your home equity and borrow more money at a lower rate while giving you cash to use for your second home.
Whatever you choose, be ready to provide your credit report, employment history, income, and assets.
Defining the use of the property
Carefully consider what you will use the second house for because your mortgage lender will want to know. How you use your home, and how much time you spend in it will also make a difference in your taxes. An investment property used to upgrade and sell or rent may face a higher down payment and a higher interest rate.
Second homes are considered less risky than investment properties and, therefore, might result in a lower interest rate. Your new property will qualify as a second home if:
You live in it for part of the year
It is one unit
It is kept for your personal use for at least half of the year
It is not located too close to your other house
It is not under a property management company
When purchasing a second home, consider where you want it carefully. It can be easy to get bored of a location you are familiar with, so make sure to choose a spot that will never get old even when traveling there every year. Another thing to consider is that travel expenses can add up when you go to your vacation home regularly. Choose a location you can get to with minimal stress and costs.
Your second home is just as much a home as your current one and should be near the same amenities. Nearby grocery stores and restaurants are essential, but even activities such as gyms or golf can add to the experience and help the vacation home stay attractive over time. If you are looking for a peaceful getaway away from traffic, people, and noise, you should still make sure a grocery store and market are accessible, and the road will remain passable to yourself and others throughout the year.
Putting the house up for rent
Some homeowners put their second houses up for rent while they are not using them. Short-term rentals can provide a generous stream of income. You will want to explore the services available and their costs to make sure your ROI is attainable. The property will need to be cleaned between renters, and you will have advertising costs and other operating expenses to consider.
Another thing to be careful of is the local regulations for rental property. These laws vary widely by city and state and even by neighborhood in some instances. Austin requires the homeowner to have a Short-Term Rental License.
With a rental property, you may also have to switch up your vacation times. The typical vacation season is the most lucrative time for rental properties, so if you want to rent, you may want to consider planning your vacations during the off-season.
Taxes will differ depending on whether the house is considered a personal residence or a rental property. A property is considered a rental if it is rented for more than 14 days per year. In that case, if your expenses exceed your rental income, you can report losses on your taxes. On the other hand, if your home qualifies as a private residence, you may be able to claim a mortgage interest tax deduction. You should consult a tax professional about what your taxes will look like with a second home.
Help with finding a vacation home
As with any house search, a good local realtor can make all the difference in the world. If you are looking to purchase your second home in Austin, TX, the Speed and Neuren Group could be a great fit. The team of relationship-focused professionals is led by Lindsay Neuren and Ross Speed. They are Austin locals experienced in buying, relocating, investing, and moving.