Purchasing a second home is a solid option for growing a portfolio and it also means having access to a vacation home or an extra source of income from rent. Just as a buyer might when purchasing their first home, buying a second property means considering several factors like budget, timing, savings, and credit.
Many homeowners looking for a second home already have experience with the process. Everything a buyer should expect in buying a first home is the same as when buying a second home, but a few extra concerns do exist.
Let’s examine the reasons for buying a second home and how to accomplish it in a real estate market filled with volatility and unpredictability.
Benefits of Buying a Second Home
For many buyers, a second home is an income property for most of the year and a vacation property for part of the year. Homeowners may list the home on a short-term basis and use the home a few times a year for vacations. However, these are just a few of the ways a homeowner might use a second home.
Some of the most important benefits of owning a second house include the opportunity to build equity, to purchase a home for an eventual downsizing or retirement, and to build generational wealth. Buying a second home may offer incredible benefits, whether the goal is just to own a simple vacation home or building equity is the overarching goal.
Should a buyer have the financial means and ability to purchase a second home, the process will almost always result in a net gain to the family’s personal wealth and satisfaction. Almost no other investment is as solid as the purchase of a home, and owning a second home is literally twice as good as owning just one.
Preparing to Buy a Second Home
Just as a buyer might with the purchase of a first home, buying a second home requires a lot of financial planning and positioning. Although the oft-muttered phrase “location, location, location” is certainly important in finding a home to purchase, budgeting and getting one’s financial ducks in a row will always be the first step in the process.
Costs that a homeowner will likely encounter after purchasing a second home include:
- Mortgage principal
- Interest
- HOA fees
- Property taxes
- Utilities
Where a second home may differ in its costs from a primary home is in the travel costs and the costs associated with having a tenant or a vacant property. If the home is on the other side of the country, it’s important to budget the travel costs of reaching the property regularly.
Owners of a second home should also note that costs will occur whether there is a tenant in the home or it remains vacant for most of the year. The homeowner may need to partner with a property management company, particularly if the homeowner lives very far away from the property. Whether the home is vacant or filled, homeowners should be prepared to pay for general maintenance just as they would on a primary residence.
The Process of Buying a Second Home
Once a homeowner has examined all likely financial concerns, the next step is to research and understand the types of financing available for the purchase of a second home. Homeowners who plan to purchase a home in cash won’t need to worry about the differences in financing, but most people who buy a second home do purchase the house with a traditional down payment and a mortgage loan.
However, FHA and VA loans aren’t normally available for second homes, particularly when the house is solely an investment property. Borrowers will either apply for a conventional loan or a jumbo loan, and the way the property is classified may impact the terms of the loan. U.S. News & World Report shares that buyers may have up to ten conventional mortgage loans, whether the loans are investment property loans or second home loans.
The lender will classify the home as one meant for personal use or an investment property, and each classification comes with different qualification requirements. The most important thing to remember here is that getting a loan for an investment property is the toughest of the two options. The income requirements are usually stricter, but some lenders do allow homeowners to count their expected rental income as part of their total income when applying.
Buying a Second Home is an Exciting But Complex Process
According to the National Association of Home Builders (NAHB), more than seven million homes in the United States are second homes, which is about five percent of all housing in the country. No matter how educated one is in the process, it’s important to conduct ample research into the process before making any offers. Buyers may find the process less stressful when they choose a real estate agent and lender in advance, which can minimize surprises and ensure approval when loans are involved.
Have questions?
If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].
