By the end of 2021, demand for second homes was up 77% from pre-pandemic levels,according to the real estate brokerage Redfin.This was partly due to the considerable number of second-home buyers, driven by the flexibility of remote work and other pandemic-related factors, who were looking for the perfect vacation home or investment property. But even if demand is high, should you buy a second house?
Second homes can be many things – a place where family gathers for the holidays, a future place for retirement, or a much needed getaway. But for the homeowner looking to diversify their assets and build equity, second residences can also be good long-term investments, because property values generally are not tied to the stock market. They can also be another source of income as a rental.
What to consider
Whether you should buy a second house depends on several factors. Most consumers will have to borrow money to be able to purchase a second home. Interest rates for second homes aren’t as low as they are for primary homes, so you might need more than the standard 20% down payment. And like any loan, banks will determine if your income is sufficient to qualify you for an additional mortgage. Consolidating high-interest debt into a lower payment, using a home equity line of credit (HELOC) or other low-interest products can improve your financial picture for lenders.
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As a second-home owner, you have double the financial impact. For example, you may have a sewer pipe problem in your main residence and then, a short time later, you need to replace the water heater in your second home. Then, there are double the everyday expenses ranging from second mortgage payments (including homeowners’ insurance and property taxes), to utilities, HOA fees and more.
Renting the house out can be a smart way to offset the additional expenses of your second home. However, renting the house out can add additional expenses too- management fees, depreciation and repairs, and property taxes.. The IRS classifies a property that is rented for 14 days or less each year as a personal home, which means you can’t deduct any expenses. If you intend to rent out the place for 15 days or more a year, your mortgage rate may be higher. And keep in mind that renting to others means more wear and tear, so expect to spend another 20% of your budget on repairs.
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For some, debt can seriously impact their financial success, but for others, debt can be “good”. But what is good vs bad debt? Good debt is debt that helps you build a better financial future. Bad debt, on the other hand, is no longer financially helpful and can even put you at risk for bankruptcy. If your home increases in value over time, a second mortgage is considered to be good debt. You can write off mortgage interest on a second home loan, as you can on a primary residence, up to a combined $750,000 for both residences. And paying down your mortgage also increases the equity in your home and grows your overall net worth.
With careful planning, buying a second house can be a good long-term investment. For over 30 years, Blankinship and Foster have helped clients successfully navigate life events and transition into retirement. If you’re considering purchasing a second home, contact us today to schedule a consultation.
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