Thinking about buying a second home? Below are seven steps to consider when making your decision.
1. Decide whether it makes financial sense – Is it for an investment, a vacation home, or both? Start building up cash reserves now.
2. Decide where and what type of home to buy – Consider resale value, convenience and amenities, property tax rates, the availability and closeness of medical care.
3. Look at the tax implications – You’ll now have income tax on top of property taxes if you choose to rent out the property. If you’ll be renting out a vacation home, how long you stay at the property can change how much you’ll owe in income taxes. If you rent out the home for 15 days or more during the year, you have to report all rental receipts to the IRS as income, but you can also deduct operating expenses such as utilities, repairs, insurance and management fees against that income.
4. Prepare short term cash and long term financing – If you are not purchasing your second home or vacation home with all cash, you’ll need to come up with the down payment (normally 20% of the purchase price) and loan for the remaining balance.
5. Consider non-traditional financing – Borrow from family and friends, get a partner in the property to share with, and look into whether or not the seller would be willing to carry a second mortgage for a few years.
6. Prepare if you will be a landlord – Finding good tenants or trustworthy vacation renters, understanding and preparing leases or short-term agreements, and dealing with ongoing management and repairs are just a few of the practical and legal issues involved.
7. Protect your second home:
a. Get a home inspection
b. Purchase title insurance, hazard insurance and liability insurance