These real estate trends seem at least risky, but they may be suitable for some buyers.
When is it appropriate to buy your second home first?
Janet Farmer, branch manager and mortgage loan originator at Hyperion Mortgage in Atlanta, points to the rise of remote work as a positive for potential buyers. With more employers adopting remote work patterns, buyers gain more flexibility and a better opportunity to purchase their second home while essentially living in a rental.
Factors to consider before buying your second home first
Mortgage rates: When financing a home you don’t intend to use as a primary residence, you may have to bear higher costs. “Durn warns that many mortgage products and interest rates are exclusive to owner-occupied homes and first-time homebuyers,” and when these rates change, your profit margin can change as well.
Taxes: “When selling investment properties, capital gains taxes are typically higher on investment homes, as they do not benefit from the same exclusions and allowances available to personal residences,” adds Durn. Before taking any steps in buying your second home first, it is advisable to talk to a banker, mortgage expert, or tax advisor to ensure you understand the financing and tax implications.
Home maintenance costs: Whether you are buying a house or a condo, you can’t just purchase the property and forget it. “The second home will require maintenance, decor, and landscaping, and appliances and utilities will degrade over time, requiring regular reinvestment in the property,” explains Durn. And if you buy a home that needs extensive repairs, you have to factor in that cost when calculating the total cost of ownership – and don’t forget you can’t rent the property until you fix it.
Rental income and lack thereof: When it comes to renting out your property, it is not always that easy. “Investment properties are often not rented all the time, leading to revenue lags,” says Durn. You will also need to make a wise decision about the type of tenants you want to attract. Is your goal to have the same person (or people) occupy the home year-round? If not, do you plan to attract tenants who will be in the home only during certain times of the year? Don’t forget that if you plan to vacation in your second home, tenants will need to vacate when it is your turn to visit the house. This time will also be a period without rental income.
Internet service: This may not be your first consideration, but it can quickly become relevant. For example, let’s say your dream is to buy a second home off the grid – deep in the woods or atop mountains. Farmer advises doing the necessary research to ensure that the area you want to buy has the required resources. “If access to the Internet and mobile phone service is essential for your work, investigate the cost and reliability of services in that area,” she says. Coastal or mountainous areas may experience more frequent service interruptions – and this may be acceptable when visiting a beautiful location for a few days, but not when you plan to stay there for several months out of the year. And if you plan to rent the home, is this a place others will pay to stay in for more than a few days?
Additional questions to ask yourself
As a general rule, when buying a second home first, some considerations are the same as buying your first home. Veronica Fuentes, managing director at Northwestern Mutual, provided a list of questions to ask yourself before making a decision:
- Is…
- Is the house in a good location and in a school district and close to public transportation?
- Is it located in a high traffic area?
- If you plan to rent the property, what type of tenants do you want to attract (singles, married couples, families)?
- Do you have enough saved money to make a strong down payment and cover potential future repair costs?
- How quickly can you find tenants for the property?
- In the event of vacancy, do you have enough savings to cover the mortgage for some time if you have to pay it yourself?
As with any financial decision, it’s important to do what suits you and not to follow trends or what others are doing. If you are considering buying your second home while still living in a rental, be sure to budget for all potential costs (and save plenty for unexpected expenses) before moving forward with any decision.
Source: https://www.realsimple.com/should-you-purchase-your-2nd-home-before-selling-your-1st-6745549
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