Many of our clients inquire with our team prior to buying a second (or third!) home. It can be a riskier investment with tougher underwriting requirements and typically requires a larger down payment than what was required for your primary residence. Because of this, it’s important to critically assess your purchase decision before committing to buy.

Before investing into another property, spend some quality time considering these key financial components:

Define How You Will Use the Home

If you’re considering a home at a vacation location you visit often, first determine how much time you intend to spend on the property and the costs associated with maintenance. If you plan to stay for shorter periods, a vacation rental may be a less costly and less time-consuming option. If you visit frequently or plan to retire in the area, purchasing a second property in the area may be a solid investment in your future.

Consider Costs vs. Return on Investment (ROI)

Owning two homes can result in double costs for everyday expenses. Whether you’re looking for a vacation property or an investment opportunity, consider how these costs can impact your overall financials and potential for ROI. Often overlooked costs include: 

• HOA fees
• Property taxes
• Utilities
• Rental management fees
• Cost of furnishings 
• Ongoing average maintenance costs

Considering all of the costs can help you make a strategic decision that you don’t regret down the road.

Look at Tax Implications and Insurance

The tax implications of buying a second or third home vary by state, so it’s important to do your research and find out exactly what they are. States may have varying tax policies and rates, which differ from your home state. If you’re a client, we can help you work through this process. 

You may also need specific insurance peril policies outside of your standard home insurance, such as wildfire or flood coverage, which can add significant expense to your investment. It’s always a good idea to discuss your options with your insurance provider to get a general idea of insurance costs prior to moving forward with your purchase. 

Conduct Your Due Diligence and Seek Advice

The second home can become a solid financial investment or a flat-out monetary disaster, depending on how you handle the purchase. Working with financial professionals you trust is essential to your success. We often counsel our clients on big purchases like second homes, helping them to determine the overall impact on their financial goals and whether they should wait or buy now prior to making a big investment. 

We always recommend that you also find an experienced realtor with expertise in the type of properties you’d consider purchasing, along with a tax planner to help you understand your tax obligations and any breaks you may be entitled to for owning a second home. If you are in need of a connection to either of these resources, we would be happy to make introductions to professionals we trust. 

Buying Your Second Home Should Be More than Just an Emotional Decision

Buying a second home is an exciting milestone, but it’s also a daunting task. The resolution to invest in a second home should not be taken lightly. Considering all of the factors involved will ensure that your expenses can comfortably accommodate the new expense.

If you’re considering a big purchase like a vacation home or investment property, we’d love to help you understand how it fits into your long-term financial plan. Connect with our team today to schedule a consultation. 

Financial Professionals do not provide tax, legal or mortgage advice and this should not be considered as such. Please consult a tax, legal or mortgage professional for advice regarding your specific situation. 4821588/DOFU 7-2022