Written by Nicolas Allen CFP®
Buying a second home brings with it exciting possibilities. Perhaps it’s a place where you plan to make lasting family memories — or it will be your quiet refuge from the hustle and bustle of everyday life. Whatever your vision for the property, it’s important to consider whether you’re ready to make the commitment.
Here are some questions to help you explore your readiness to take on this additional financial obligation.
Why are you buying a second home? You may be looking for a weekend getaway reserved for you and your family. Or you may want a rental property that generates income. There’s no right or wrong answer, but how you use the property will have financial implications. You’ll want to understand how these distinctions will affect your property taxes, insurance requirements and income taxes, including capital gains tax when it comes time to sell.
How will you pay for your second home? Purchasing with cash avoids lender’s fees and the burden of a monthly mortgage payment. But it also makes your money less accessible in case of emergency. Financing your second property also has its downside. Lenders tend to require large down payments on second mortgages. Mortgage points, closing costs and pre-paid escrow add up. And you’ll have another mortgage payment to manage every month.
What extra costs will you incur? Think beyond property taxes and insurance. You may need furniture. You may envision home improvements. Even if you’re a do-it-yourselfer, you’ll need materials and permits. Your second home will generate monthly utility bills. You may have homeowner association fees. If you’re buying a waterfront property, plan for higher insurance and maintenance costs—and the added cost of watercraft. Assuming you don’t live next door to your new property, you’ll have travel expenses getting there and back.
How will you manage maintenance? Homes need upkeep, inside and out. If you become a landlord, your renters will expect quick fixes when the washer goes out or the drain backs up. Be prepared to pay someone to keep an eye on the property even when it’s empty. Property management brings peace of mind but can be pricey.
How will a second home affect your taxes? You may be able to deduct interest payments, real estate taxes and points on a second mortgage if you meet certain conditions. Rental income may be subject to income taxes. You’ll need a tax expert to help navigate this complex subject and set your expectations.
How does this purchase fit into your financial plan? If your priorities are in order, a second home may fit nicely into your long-term financial goals. Are you making regular contributions to your retirement account? Do you have minimal debt? Do you have a substantial emergency fund? Is the college fund growing? Answering these questions in the affirmative may mean you can safely start shopping for a second home. For a second opinion, consult your financial advisor to determine whether dual home ownership makes financial sense for you and your family.
Nicolas Allen, CFP® is a Private Wealth Advisor with Ameriprise Financial Services, LLC. in Fresno, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 14 years. To contact him, consider http://www.ameripriseadvisors.com/nicolas.j.allen, (559) 490-7030 option 2, or 7433 N. First Street, Suite 102 Fresno, CA 93720.