Buying a 2nd Home:  What You Need to Know

     People buy a 2nd home for several reasons.  As we head into summer, it sounds fantastic to have a lake house in Maine, a condo in Aspen, or a beach house in North Carolina.  You may be thinking of a 2nd home as an investment property until you are ready to retire, or a place for your children to live while at school, or maybe just a way to diversify your assets; although, there are several things to think about before you jump into purchasing a piece of real estate! 

     Vacation Home V.S. Investment Property – How you treat your home financially might be dependent on the purpose of your purchase.  If you see the house as a place to vacation with your family, you might significantly upgrade the exterior and interior of the property.  On the other hand, if you intend to buy the property for the purpose of an investment property, you might view it as a means of generating rental income.  The rental property may also create tax deductions and provide you with passive income.  There are rules designated by the IRS; for example, you must occupy the home for 14 days (or 10% of the days), or it would otherwise be rented out to maintain your eligibility for the mortgage interest deduction.

     Pros & Cons of Owning a Second Home – As you explore the options of purchasing a 2nd home, you should be cognizant that there are many advantages and drawbacks.  You may want to consider purchasing a condo or townhouse V.S. a home, as the maintenance and upkeep would be much less.

     Pros – Buying a 2nd Home

A designated Vacation Spot – your family may be skiers, or love being near the beach or lake.

     A place to retire – If you plan to move after you retire, it would be smart to start early.  Learn about the community by creating a place that you love, thus providing you with a vacation home now, and a retreat when you retire in the future.

     Diversifying your assets – Real Estate tends to appreciate in value, especially in popular vacation spots.  You could use the home as a means of diversifying your portfolio away from liquid stocks & bonds.  Tangible assets give you the Ability to choose whether you want to keep or sell the property in the future.

     Rental Income – If you decide to rent your home to a tenant, you can earn rental income to help offset the expenses, like property taxes and maintenance.  If you would like to vacation at your home, you can still rent it out for short-term rentals during the time you’re not using it. 

    Cons of Buying a 2nd Home

     Added Responsibility – Owning a 2nd home is double work in both homes.  Such as upkeep, maintenance, insurance, decorating, landscaping.  You should consider how you will maintain the property grounds and manage the financial burden of taking care of an extra property.

     Risks of Security and Property Damage – You cannot be in two places at once; therefore, you may need to consider the security of your unoccupied property, such as a caretaker or maintenance person.

     Additional Expenses – if you live in Pittsburgh and your property is in Florida or South Carolina, there will be expenses in car or air travel.  Updating your new property by replacing a new roof, updating the appliances, and renovating kitchens and bathrooms can all be very expensive.

Four things to Consider before Buying:

  1. Location – choose a place not too far away or central to where your family member(s) live.
  2. Affordability – ensure you have budgeted for ownership of two houses.
  3. Maintenance – if you are by the beach, there are hurricanes; this means constant maintenance such as repainting each year.
  4. Financing – you could pay with a bridge loan or a loan against your portfolio assets. Interest rates are at an all-time low; meaning, it is a good time to borrow!

     You could also place the 2nd home into a QPRT – a Qualified Personal Residence Trust.  This is a very intelligent estate strategy.  The purpose is to remove the value of the property from your estate; therefore, no estate tax and the property’s value is left to your family or chosen beneficiaries.

     There are many aspects to consider when buying a second home for vacation, whether it’s for an investment or a personal property!