Buying a Second Home the Right Way
Considering buying a second home? You’re certainly not alone.
In October 2020, the demand for second homes was 100% greater than the prior year. In fact, right now, second homes and investment homes are in higher demand than primary residences.1 It’s easy to see why. Vacation homes can help families build lasting memories. Meanwhile, investment properties can offer a great deal of income.
But before you call a realtor and head to open houses, think through what purchasing a second home may look like for you. In this article, you’ll find questions to ask yourself before buying a home, and you’ll learn some valuable tips to help you discover how to purchase a second home.
Is a Second Home Right for You?
You’ve always dreamed of owning a quaint house by the beach. Or maybe you’re looking to escape a crowded, fast-paced city. Before moving too far ahead, make sure a second home is right for your lifestyle.
Here are some questions to consider:
Will you be able to use your second home frequently? Or rent it out?
A second home sounds like a great idea, but will you visit it often enough? Perhaps you have pets who don’t like to travel. Or maybe you have young children who thrive on routine. Consider all of the variables in your life and ensure you’re able to visit your home—or rent it out—frequently.
Can you hire someone to take care of the home while you’re not there?
All homes, including second homes, require regular maintenance. You need to plan how you’ll take care of unexpected (or planned) work. For example, are you able to hire someone to mow the lawn, take care of the plumbing and clean if you’re unavailable?
Are you prepared for the impact on your taxes?
First, decide if you’ll rent out your home. If you don’t rent it out, your taxes will be similar to those on a primary residence. However, if you do rent your home, you’ll have more deductions available, but you’ll also need to pay income tax on your rental earnings.2 To find out exactly how your taxes will change, it’s best to talk to an accountant.
Are You Ready to Buy a Second Home?
Next, make sure you’re financially ready to purchase a second home. Bankrate.com offers a few questions to help you gauge if you’re ready for another mortgage:3
- Are you currently saving for retirement?
- Do you have a solid emergency savings? This should be six to nine months of cash available in case of an emergency.
- Have you paid off your credit card debt?
- Is your current home paid off?
If you answered “yes” to all of these questions, you may be financially ready to purchase a second home. And here’s good news—it’s also a great time to purchase a second home. As of January 2021, interest rates are particularly low. But don’t expect to get the same rates as primary residences. Rates for second homes can be up to 0.5% higher than rates for primary homes, while investment homes are usually between 0.5% and 0.75% higher.4
What Purpose Should My Second Home Serve?
Before researching second homes, think about your goals: Are you simply looking for a vacation home, or an opportunity to earn extra income? If you want a second home long-term, consider locations that are conducive to you and your family’s lifestyles. Look into areas where you already enjoy spending time or can potentially envision settling down.
If you want your second home to be an investment, rental properties can provide a great source of income during the weeks or seasons you’re not around. But they’ll also keep you busy, since you’ll be assuming the role of landlord and taking care of your tenants’ needs. If you need help, you can consider hiring a property manager. Although doing so can reduce your returns on investment.5
And here’s good news — it’s also a great time to purchase a second home. As of January 2021, interest rates are particularly low.
Regardless of how you plan to use your additional property, you’ll need to purchase a second home insurance policy, which may be different from your existing home insurance coverage. Your second home’s location, type of property, amenities and how consistently it’ll be occupied can all impact your premium.
And because owning another home means taking on a new financial responsibility, it can also impact your need for life insurance. Be sure to review your coverage, perhaps aligning a term policy with the length of a new mortgage if you need to take one out.
What Type of Second Home Should You Buy?
If you’re using your second property as a lasting vacation home, make sure it’ll grow with you and your family over the years. Find a spot that’s easy to maintain, whether it’s choosing a tidy patio in lieu of a sprawling lawn, or a house with enough space.3
When investing in rental properties, look for areas that will be attractive to renters, such as neighborhoods close to a college campus or vacation hot spots. For an idea of which location may work best for you, consider these potential settings:
A Lake Retreat
Before buying a lake house, try renting a place in the area to see which setting you like best: on the water, a few blocks inland or closer to town. Consider Chestertown, New York, a small, southern Adirondack lake town that was listed by Realtor.com as one of the top affordable lake towns of 2020.6
A Mountain Town
Are outdoor activities like skiing in the winter and hiking in the summer right up your alley? Consider a property up in the clouds, whether it’s a fancy resort setting or smaller ski town. Ludlow, Vermont, is one option with a high return on investment.7 Home to Okemo Mountain, Ludlow offers a mix of restaurants, skiing, hiking and other outdoor activities.
If you’re looking for a secluded getaway, a country home off the grid can be just the ticket. With plenty of trees and few neighbors, this personal retreat can help you escape, slow down and take in the day. Located in the Smoky Mountains, Pigeon Forge, Tennessee, may be a tranquil place to consider. With beautiful scenery, campgrounds, theme parks and family-friendly attractions, Pigeon Forge is a unique, affordable town with much to offer.8
Now that you know you’re ready to purchase a second home, the fun can begin. Call a reputable realtor in the area where you’d like to buy. Then start visiting open houses and making appointments to see homes. This is when you can consider home features and how much work needs to be done.
Above all, take your time during the purchasing process. Doing your due diligence now will pay off as you’ll truly be able to enjoy your investment later on.
- Redfin and Optimal Blue, analysis of mortgage-rate lock data, November 19, 2020.
- Considering buying a second home? Here’s what it could mean for your taxes, Business Insider, October 2, 2020.
- Second-home fever? 6 things to know before you buy a summer pad, Bankrate, July 9, 2019.
- Second home versus investment property: Mortgage rates and rules, The Mortgage Reports, January 23, 2020.
- 2017 NAR Investment & Vacation Home Buyer’s Survey, National Association of Realtors, 2017.
- Avoid the Crowds and Take the Plunge: Top Affordable Lake Towns in the U.S., 2020 Edition, Realtor.com.
- The 10 best places in the US to buy a winter home right now, ranked, Business Insider, December 10, 2019.
- MyPigeonForge.com, 2019.