Of course, buying your first home is a culmination of your hard work, penny-pinching and stressful times. From there you may view it as plain sailing because you’re on the property ladder but buying a second home, as tantalizing as it may be, contains as much risk as when you were buying your first one. Its a great idea to own a second home or a vacation home. Its a tangible place to invest your money. You can build it up and change it into your perfect retirement home, and its, generally, a very safe asset. But you do need to bear in mind the potential pitfalls that come with another property.
The Obvious: Finances!
Lets get this out of the way now, if you’re not in the market for real estate investment, can you be sure that you will be able to keep up repayments on two properties? Its a very simple question, but do you have the cash? According to the Census Bureau, of every single homeowner, two-thirds have a mortgage. And if every one of those people decided to stretch their finances to another property, thats a lot of people who would be in financial struggles, which would lead to increased borrowing and increased debt. Now, that is the dramatic end of the spectrum, but in buying a second home when you havent finished off paying your first home is a big risk, especially if you lose your capacity for earning, you will be saddled with two payments every month! Your options? Keeping your financial risks to a minimum can be done in a couple of ways. Firstly, sticking to all-cash real estate purchases, where you pay the balance with cash at the time of closing, which has benefits for you because there’s no mortgage and no financing. On the other hand, you could be faced with some tax consequences, such as no mortgage interest tax deduction or you could lose some earning power. Of course, in paying all-cash, you need the relevant funds! The other option is to pay off your first property and then go for your second home. It frees you up financially, and it becomes a real investment. You can then spend time building up the property to your standards and make it into a future retirement home.
Is The Home In A Risky Area?
The risk is part and parcel of buying another home, but there are so many things you need to factor in, and understanding, if the home is in a place that is considered risky, is one of those. The first thing to address is the purpose of your second home. Are you planning on using it as a vacation home, or are you going to use it to rent out to tenants in the meantime to get a bit of extra cash? In renting it out to people, you may consider it an easy way to bulk up your finances, but you are responsible for the maintenance and replacement of broken appliances, and if the house is in a high-risk area, you will be paying a lot more for insurance. Other risk factors to consider includes whether the area is prone to natural disaster or anything like floods or tornados. If your property is on the seafront, it will cost more in insurance, but you can command a higher rent due to the desirability of the location. But you should think about your retirement goals also. Can you envisage yourself living in that place? If you look at ranches for sale, they are in areas of the countryside or natural beauty, which makes them a far more appealing place to retire to. Of course, you need to be in the market to look at buying a ranch, and they arent cheap. But if you planned on renting out, you could make back the mortgage in how much you charge. If you aim to buy in a risky area, you may need to budget more into your plan to allow for unexpected costs.
The Hassle Of Time
Linked into if you potentially rented the property out, do you have the time to spend on the general upkeep of the house? Although a second home won’t double the amount of time spent, it will certainly double the hassle. If this is a vacation home, you need to consider the perils of it not being occupied for most of the year. If the house gets a leak, it could go undiscovered for a long time, and by then the damage will have drastically reduced the value. Or it could be primed for burglary. Vacation homes tend to be in areas with other vacation homes, and burglars will keep a close eye on when a property is vacant or not, so make sure you install a security system and have adequate insurance cover in place. Other time-based hassles may come in getting the house. As you well know, buying a home can take a lot longer than you anticipate, and if you are in a rush to move into this house, it won’t happen as quickly as you’d want. But, dont forget, time is a blessing too when it comes to buying a home for retirement because you can take as long as you want to build up the property as you want it. But if the home is located far away, the hassle may be in the traveling.
The Emotional Connection: A Good Thing Or Not?
Some people end up with a second property by accident. This could be due to inheritance, and while it may be viewed as a good thing, if the property still has a mortgage left to pay, you are saddled with the outstanding balance. The emotional connection to the home means that you are determined to keep it in the family and so you potentially bankrupt yourself to make sure it stays in the family. You might justify it in other ways, such as it becomes a handy vacation home or its a nice way to be close to other family members you rarely see. Or if your parents offer for you to buy their home so they can pay their medical bills, it can really put you between a rock and a hard place. But the fact of the matter is that if you’re not in the right state financially, it can be a massive burden, whichever way you look at it. Who doesnt want to help their family members? And while it may be difficult to walk away from that type of situation and you’re only considering buying the property because you have the emotional connection. But if the time isnt right, or even if the property isnt right, you would need to politely decline. If you have family members to help, you can do it in other ways; and you’ll still have fond memories of your family home.
Are You Rushing Into The Decision?
You need to think about this because a large purchase bought on impulse is seldom a good idea. If you’re buying a vacation home, you need to do your research and sleep on the idea before you launch headlong into buying something you potentially won’t want five to seven years down the line. If you’re buying a home purely for the purposes of vacationing in, you will always have time on your side because for the cost of a holiday home you can pay for a decent two-week vacation with hotel bills. Vacation homes come with completely different tax write-offs in comparison to a home you are planning on buying for the purposes of renting, and each option comes with their own specific sets of costs. And its not just the costs, but as mentioned previously, do you think you can see yourself in this home in 20, 30, or 50 years time? If not, and it is just a place that you could get bored of, or there is no potential for you to pass it down to your children, is there any logical reason in purchasing it at this time? You can always consult a professional loan officer to get the bearings and costs on purchasing a second home and get preapproval before looking to make the process easier. But if there is no real tangible reason to purchase another property then you really need to decide if its the right avenue to go down.
Its a risk to get into buying a second property. And we all think its much better to have two properties than one, but every home comes with its risks, and these are a few that can make the whole process a very difficult one. And you need to think of the financial implications overall, because if you buy a second property so you can get a third, and fourth, and so on, you could potentially be compounding the debt problem. You really need to look at your situation in life and in your finances and decide if its really going to benefit you.