Are you considering purchasing a second property? When managed properly, a second house could be an excellent investment. Perhaps you’re looking for a place to escape to during the summer — a vacation home is a common desire for families who love to travel.
A person may be interested in financing a second property for several reasons. Read on to learn how to buy a second home, what to keep in mind, and some essential financial factors.
How You Could Benefit From a Second Home
There are many potential advantages to purchasing a second home, like having a fun place to spend a holiday break or earning extra income by renting it out.
Here are a few benefits that may result from investing in a second property:
One of the primary reasons people choose to purchase a second home is for vacation purposes.
Owning a vacation property allows homeowners to have a personal retreat in their favorite destination, ensuring a familiar and comfortable environment away from the stresses of daily life and providing a space to create lasting memories with friends and family.
Moreover, vacation homes can be customized to the owner's preferences, offering a tailored experience unavailable through traditional accommodation options.
A second home can also be a source of supplemental income through rental opportunities.
With the advent of online platforms like Airbnb and VRBO, it has become increasingly easy for homeowners to rent out their properties to vacationers. Short-term rentals can be highly lucrative, often generating more revenue than long-term leases.
This rental income can help offset the costs of owning a second property, including mortgage payments, property taxes, and maintenance expenses. Furthermore, renting out a second home can provide valuable tax deductions, making it an attractive option for many homeowners.
A Good Investment
Real estate has long been regarded as a sound investment, and a second home is no exception.
Over time, property values typically increase, allowing homeowners to build equity in their second home. This appreciation can result in a significant return on investment when it comes time to sell the property.
Additionally, owning a second home in a desirable location can further increase its value as demand for vacation and rental properties in popular areas continues to grow. For example, Florida is an excellent place to purchase an investment property that doubles as the perfect family vacation spot all year round.
Lastly, a second home can serve as a strategic retirement plan. As homeowners approach retirement age, they may choose to transition their second property into their primary residence. This move can be advantageous for several reasons.
First, it allows retirees to downsize from their current homes, potentially reducing living expenses and property taxes. Second, it provides the opportunity to relocate to a more desirable location, such as a warmer climate or an area with better amenities.
Moreover, by transitioning to a second home, retirees can capitalize on the equity built over the years, further securing their financial future.
A Few Factors To Consider
Before you purchase a second home, you should consider a few things. Factors like whether a new mortgage payment will take a toll on your finances if you can afford the upkeep, and the distance the second property is from your current home, are all very important.
Where is the property you’re considering located? Location is a huge factor; purchasing a home in an inconvenient location could be more trouble than it’s worth.
Location plays a significant role in rental success as it greatly influences the property's desirability. A well-located property near popular attractions, restaurants, and transportation options, will attract more interest and higher rental income.
Moreover, proximity to essential neighborhood amenities, such as grocery stores, hospitals, and schools, enhances the overall appeal, ensuring consistent demand and long-term success in the rental market.
Personal residences and rental properties fall under different tax classifications. You might be wondering — how does the International Revenue Service distinguish between the two property types?
According to the IRS, you must use the property for personal reasons for more than 14 days out of the tax year to be classified as a personal residence.
If you happen to rent out your personal residence, the number of days you use it must exceed 10% of the total number of days it’s inhabited by someone else to maintain its classification.
To be classified as a rental property, a home must be rented to someone for at least 14 days of the tax year. Renting a property out has tax implications. Rental income should be reported to the IRS, and you have to pay taxes on that money.
Typically, you must report all income generated from a property, regardless of its classification. There is an exception, however, for properties used as personal residences (rented out less than 14 days in a single tax year).
In this instance, you shouldn't report the rental income. You also shouldn’t attempt to deduct any rental expenses, as your home is not classified as a rental property.
Financing a second property can be achieved through various options, with conventional and non-QM loans being two notable avenues.
Conventional loans are widely accessible and adhere to the guidelines set by Fannie Mae and Freddie Mac. For an investment property, conventional loans often require:
- Credit score at or above 620
- Larger down payment compared to a primary home purchase
- Lower DTI needed compared to a primary home purchase
- Income documents such as W-2s, tax returns, pay stubs, and bank statements
Alternatively, non-QM loans, or non-qualified mortgages, offer more flexibility in their underwriting guidelines. These loans cater to borrowers who may not meet the specific financial profile necessary to obtain conventional loans, including people who:
- Are self-employed
- Require a higher loan amount
- Are a foreign national
- Have prior credit events (i.e., foreclosure, bankruptcy)
- Want to use cash flow of property instead of personal income to qualify
While non-QM loans can provide greater accessibility, they may also carry higher interest rates or additional fees.
The Underwriting Process
The underwriting process for both conventional and non-QM loans involves a comprehensive evaluation of the borrower's creditworthiness and financial stability.
For conventional loans, underwriters follow the guidelines established by Fannie Mae and Freddie Mac. They scrutinize the borrower's credit score, debt-to-income ratio, employment history, and assets to ensure they meet the predefined criteria. A high credit score and low debt-to-income ratio are particularly crucial for securing favorable loan terms.
In contrast, non-QM loans offer more flexibility in underwriting guidelines, accommodating borrowers who may not qualify for conventional loans. Although non-QM lenders still assess credit scores and financial stability, they might consider alternative income documentation and permit higher debt-to-income ratios. However, this flexibility often comes at the cost of higher interest rates or additional fees.
Regardless of the loan type, a thorough underwriting process ensures that borrowers can responsibly manage their mortgage obligations.
Can you afford a second home? Owning two homes requires a homeowner to be smart about personal finance.
The services required to keep a house in good shape are often costly. Faulty pipes, HVAC system repairs, and plumbing issues are just some of the costs that can arise for homeowners.
Some expenses, like pest control, must be scheduled several times yearly. Before purchasing a second property, take some time to crunch the numbers and consider whether or not you can afford to maintain two homes simultaneously.
Do you have any cash reserves you can quickly cash out on in an emergency?
Everything you’re responsible for currently — your monthly mortgage payment, utilities, property taxes, homeowners insurance, maintenance, and any unexpected issues that arise (ex: roof repair) — will be doubled.
Steps To Closing on Your Next Property
Now that you know some potential benefits and essential factors to consider when purchasing a second home, here are the steps you need to take to find your ideal property and close the deal quickly.
1. Research Real Estate Agents
A real estate agent is an excellent resource when purchasing a second home. Verify that they’re local to where you want to buy your property, and ensure you’re only searching for buyer’s agents — it's best to work with someone who represents you (and only you).
Communicate with your agent throughout the whole vacation home purchasing process, especially if you want to generate rental income from it.
2. Get Pre-Approved Early
Mortgage pre-approval will allow you to know exactly how much money you can finance for a property. This will ensure you aren’t caught off guard once you start looking. You can start the pre-approval process with Vaster today.
3. Locate Your Property
Once you’re pre-approved for financing, the buyer’s agent can help you locate your new home, help you make an offer, and negotiate with the seller on your behalf until an agreement is reached.
4. Seal the Deal
Once the seller accepts your offer, the closing process begins. This typically takes around 30 to 40 days.
During this time, you’ll need to: source a closing agent, purchase homeowners insurance, purchase title insurance, have the property appraised, have the property inspected, and plan a final walkthrough.
Pay your closing costs and sign the closing documents if everything checks out.
Since you’ve already purchased your first home, many of these steps may look familiar. Nonetheless, familiarity doesn’t make home-buying any less stressful. That’s where we come in.
At Vaster, we simplify the home-buying process so borrowers can worry less and close quickly.
What Vaster Can Do for You
We can offer you everything from local market expertise to competitive mortgage options that won't find from a big box lender. At Vaster, we’re committed to helping you find your perfect mortgage match and securing your Florida dream property.
You’ve worked hard to build your finances, so even if you’re self-employed or your credit isn’t the highest, we can still help you secure the mortgage loan you need.
If you choose to work with us, we will go above and beyond to help you land the property of your dreams. Get in touch with us today.
The Nation’s Stock of Second Homes | Eye On Housing
Buying a Second Home | NerdWallet
Topic No. 415 Renting Residential and Vacation Property | Internal Revenue Service
5 Things To Know About Buying A Second Home | Forbes Advisor
What Is My Debt-To-Income Ratio? | Forbes Advisor
Closing Costs: What They Are and How Much They Cost | Investopedia
What Is Title Insurance? Why You Need It and How to Buy It | Investopedia