Buying a Second Home? Here Are Five Things You Need to Know

Buying a Second Home? Here Are Five Things You Need to Know

  • Shrake Group
  • 05/4/23
Perhaps you’re interested in a vacation home, or maybe you want to invest in Gold Coast Chicago real estate to flip or list as a short-term rental property. There are a number of reasons why someone might think about buying a second property. It’s an exciting idea, but it’s also not a task that you’ll want to take on without careful thinking and preparation. Here are eight things you should think about before you decide to buy a second home.

How will this impact your finances?

Buying a second home will impact your books in several different ways. You probably already know a little about how to purchase a home after buying your primary residence. As a reminder, you will need to have a down payment of at least three percent if you use traditional funding to buy a home. You will also work with a lender who will supply the rest of the financing that you need to complete your purchase. After they assess your current financial condition, they will provide you with a pre-approval letter that gives you an idea of how much you can borrow and what your interest rate will be. Since different lenders will offer different interest rates, it’s a good idea to shop around and see who can offer you the best deal.

Remember that your mortgage payment won’t be the only financial responsibility that your second home requires. You’ll also have to pay property taxes, utilities, and HOA fees. If you aren’t local, you’ll have to pay to travel back and forth from your second home. There will also be additional costs if you choose to rent your home out on a short-term or long-term basis. Before you get too far into the process, set aside some time to draw up a budget for the purchase and maintenance of your second home. Consider talking with someone else who owns multiple properties to get a better feel for what kind of financial responsibilities it could require.

How does a second mortgage work?

Some people who own multiple properties will use a traditional mortgage to buy their second home. Others will pursue different options for financing. Choices could include tapping into your current home equity using a HELOC (Home Equity Line of Credit). This usually requires a minimum credit score of 620 and equity of at least 15% in your current home. Others will pursue a cash-out refinance on their current home. By borrowing more than what you currently owe, you can take out extra cash to put toward your second home. Keep in mind that this may change the current terms of your loan, such as the interest rate and the amount of time it will take you to pay off the loan.

Will you generate additional income from the property?

Since you won’t spend all of your time in your second home, you may want to think about how you can generate passive income during the times when you are staying elsewhere. If you want to maintain the flexibility to come and stay in the home whenever you want, you can list the home as a short-term rental on a platform such as Airbnb or VRBO. You’ll probably make more money on a per-night basis than you would if you rented your home to a long-term tenant, but you’ll have to make sure that you have a consistent flow of tenants if you want to make significant profits. There are also unique tax implications that come into play if you rent your property for a certain number of nights each year, and you’ll learn more about these in the next section.

How will this impact your taxes?

Regardless of whether or not you rent your home, you’ll need to be aware of how owning multiple properties will impact your taxes. You can only write off interest on up to $750,000 worth of debt. This represents a combined amount between all the properties that you own. You’re also capped at writing off $10,000 of property taxes or $5,000 if you’re married but filing separately.

You won’t have to claim any rental income if you rent the home out for less than fourteen nights during a given year, but you cannot claim any additional deductions besides the two expenses mentioned above. Once you rent the home out for fifteen nights or more, you must report the income on your taxes. The benefit is that once you report the income, you can also claim various expenses related to the upkeep and maintenance of your home. This includes any salary you pay to a property manager in addition to utilities and repairs on a prorated basis.

How will you maintain the property?

Owning one home is plenty of work, so you can imagine why many people who own multiple homes will hire a property manager to assist them in the upkeep of their second home. This is especially helpful if you spend the majority of your time elsewhere or if you want to have someone on call who can respond to urgent maintenance requests from tenants when they are staying in the home. They can visit the home to prepare the property for different seasons, and they can make sure that all home fixtures are in good working order.

What should I do now?

Shopping for a second home will be much easier when you can lean on the expertise of somebody who knows the market and understands the process. Matt Shrake and the Shrake Group are experts when it comes to buying a second property. They have been helping clients buy vacation homes and investment properties for nearly 30 years. They take pride in providing clients with exceptional service and using their superior negotiating skills to earn better deals for each person they work with. Contact their office if you have more questions about buying a second property or if you’re ready to take the next step.

*Header photo courtesy of Shrake Group

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