Home prices across the nation have been rising at record-setting rates, and things are especially hot in the Northwest. Given the real estate market’s growth and the fact that interest rates remain relatively low, it’s no wonder that many people are taking advantage and buying a second home, either for vacation or rental purposes.
But how can you be sure a second home is right for you? Here are a few key questions to get you started:
How does this fit your long-term goals?
The market may be ripe, but that doesn’t mean that real estate is necessarily the best way for everyone to grow their wealth or achieve their financial goals – especially if you already own a home.
If you’re planning to retire in your second home someday, then purchasing it now and renting it out may make sense. But if you’re just looking for a general investment to grow your cash, you may want to also consider non-residential forms of investments, like stocks or bonds, which can have a 4.5% to 7.7% return rate – and don’t include the extra headache of owning another home. (We recommend checking with a financial professional to see which route is right for you.)
And remember, you’ll almost certainly need to have 20% down in order to buy an investment property, as private mortgage insurance (aka “PMI”) is not available on investment properties. As a result, buying a second place could make a significant dent in your cash savings. Investment properties are usually considered riskier by financiers - so be prepared for a higher interest rate on the mortgage as well.
Can you afford twice the home owning “extras?”
When it comes to financial planning for two homes, it can be tempting to stop number crunching with the monthly mortgage payment, but the costs don’t end there. Be sure to calculate taxes and the need for extra emergency cash that you’ll need to cover twice the unexpected money drains – like new water heaters, fridges, etc. Everyone should have an emergency fund that covers six month of expenses, including mortgage payments, but if you’ve got more than one home, then your emergency fund should grow exponentially as well.
If you’re planning on using the second home as a non-vacation rental, then plan for operating expenses on your new property to be about 35-80% of your gross operating income. For example, if you’re charging $2,000 a month for rent, then expect to pay $1,000 in total expenses.
What happens if the economy heads south?
Carefully consider the economic outlook of the area where you’re thinking about buying. If the main industry in the area is tourism, or if most of the other homes in the area are vacation properties, then your second home will be much more sensitive to economic shifts. If the market takes a dip and you can’t rent your second place out, are you prepared to wait out a market ride without rental income?
How much “extra” time do you have?
Remember, your time is worth more than money - it’s priceless. If your second home will be a vacation rental and you’re going to be cleaning up after vacationers yourself, then be sure to factor in gas for the drive, cleaning supplies and online listing costs in your return-on-investment scenario. (Plus the loss in productivity that comes with all the extra maintenance.)
If you don’t have the extra time to manage a second home, then you may want to consider hiring a cleaning, vacation rental or property management service. Many online vacation management services, such as AirBnB or VRBO, charge between 3 and 5% to property owners for each booking. If you’re having someone else manage the booking process and listing? That’s usually another 18-40%.
We’re here to help.
As one of the nation’s premier portfolio lenders, we’re proud to keep all the loans we make right here, on our books. What does this mean for you? We’re well versed with buyers who are looking to grow their portfolio with a second home. And since we don’t sell our loans, we’re not restricted by the requirements that other lenders are; we’re able to make flexible, common sense underwriting decisions with your best interests in mind.