My wife and I are dreaming. We would love to own a second home. Not for rental income purposes, but for a place to get away. While the idea sounds simple enough, it really isn’t. There are many other things to think about before jumping in and buying a second home. Below are a few things you should consider before buying a second home.
Things To Consider When Buying a Second Home
The first issue is where the house would be located. Ideally it would be close enough so that we could get there for the weekend. In other words, a few hours drive away. Luckily, we are located in place where both the mountains and the beach are just a few hours away. I would love a mountain cabin, she would love a beach cottage.
- Down Payment.
Amounts for a down payment on second home vary widely. I have seen some estimates as low as 10% and others as high as 35%. It all comes down to your situation. If you are looking at a purchase price of $200,000, this means you are looking at between $20,000 and $70,000. In either case, not a small chunk of change. In addition, standard mortgage rates do not usually apply to second homes.
When you own a second home, you have to pay taxes on it. The kicker is that if your state offers you a homestead exemption on your property taxes, your second home probably won’t qualify – only primary residences do in most states. Therefore, you will be paying the full amount of tax every year. Depending on where the home is located, this could be a reasonable amount to a large amount of money. We would expect around $5,000 in taxes. If you decide to rent out your vacation home, see the vacation home tax rules.
- Insurance and Maintenance.
Let’s not forget about the other costs as well. These include insurance premiums every year, but also other regular bills – electric, water and sewer, gas, etc. Plus then you have to factor in repairs. Eventually the house will need a new roof. Over time, appliances will break and need to be replaced. All of this adds up.
Something that many people overlook is how much they will enjoy going back to the same place all of the time. For me, I like to experience new things. As a result, my wife and I always go someplace new. Yes there are places we want to go back to, but I’m not sure we would want to go back to the same place all of the time. When Madison asked readers Should We Buy a Vacation Home? it generated a great discussion about going to the same place versus going somewhere new each year.
- Drain On Your Time.
If you have a second home in an area that gets hurricanes, you are going to have to make sure the house is prepped for a storm. Likewise, if you are only using the house during parts of the year, you are going to have to spend a weekend sealing it up for the season and then another weekend getting it back up to living standards. That is a lot of work, and I haven’t even mentioned ongoing repairs and maintenance. When I go away, I want to relax, not work on fixing up the house. But with a second house, there are repairs that will need to be made.
Have you thought about buying a second home? Did you buy it?
Overall, there are many things you need to take into account when thinking of buying a second home. Most of it is financial. You really have to decide if the pleasure you get out of a second home will outweigh the costs, because the house will cost you a lot of money. In a sense, you are basically doubling your housing expenses – two mortgages, two tax bills, two insurance premiums, etc.
At this point in time, my wife and I are on the same page. As much as we would love to have a second home, financially it doesn’t make sense. We would rather save the down payment and the ongoing costs and go on a nice, annual vacation somewhere new. It’s something we value more than a second home.
Lastly, I do realize that the second home will build equity, but this is a moot point because you aren’t earning an income from the house. And unless you sell it, you will never realize the equity that has built up. It’s the same reason why a house isn’t an investment. It’s a place to live, not a source of income. And even if you do sell to realize the equity gain, seeing at how real estate historically appreciates along with inflation (the past 20 years has not been normal), you are better off investing in the stock market.