Buying a Second Home For Investment. Things to know

    If you are thinking of buying a second home, let our staff at DK Professionals Realty help you to make the right decision. Before you make your purchase, you’ll want to think about the following questions.

    1. How much will your second home really cost you with everything added in?

    In addition to the sale price there are associated expenses you will need to consider. Insurance providers view vacation homes differently than a primary home. Because you won’t be living there full-time, your insurance premium rate will be higher than a home that is owner occupied. An insurance company further defines their rate schedule based on whether the home is a vacant second home, or one used for long or short-term rentals. Make sure you check with an insurance agent for the costs of liability insurance, homeowners insurance, and flood insurance—if needed.

    Don’t overlook costs for property taxes, utilities, maintenance, new and replacement furniture, linens, dishware, cookware and serving pieces that will need to be replaced periodically.

    In many cases a second home will have expenses for items that you would take care of personally in your primary home. Certain maintenance items on a second home may add up if you don’t visit the home regularly. To enjoy your second home, you want to look at maintenance with an open set of eyes.

    Vacation visits to your second home can be spent maintaining your home or you can pay someone to do these things for you. Both options should be considered. Plan on spending 1-2% of the home’s value yearly on maintenance for a home in good condition.

    1. Can you really afford a second home?

    Are you mostly debt-free? Do you have good equity in your primary residence? Can you afford a 20% down payment along with 3-4% in closing costs? Buying a second home should be balanced against your other long-term commitments such as college tuition, retirement, etc.

    When buying a second home a bank will usually look at debt-to-income ratios. This is how much money you have for costs associated with both homes in addition to other debt compared to your verifiable income. A mortgage lender wants to know how capable you are of paying back the loan. The higher the risk to the lender, the lower the chance of financing conventionally. If you add up both current and future monthly expenses including your new home’s mortgage, most banks want to see that these expenses will not exceed 36% of your income. Most banks will not consider the potential rental income your second home may produce unless you have a history of this type of ownership.

    1. Why are you buying a second home?

    Buying a second home to simply save money on vacations is probably not the right mindset.

    Buying a second home should be considered as a combination of some vacation fun, an investment, a place where you plan to retire or a property that you eventually sell for a potential profit. When evaluating the investment property’s long-term potential, it’s important to research how prices have appreciated over time in the market where you’re buying. Stay away from shaky markets. It doesn’t necessarily matter what price point your home is in. It matters more how the area has performed over past years for this type of investment

    1. What are your plans for the home?

    Are you reserving the property exclusively as a second home for yourself, or will you rent it out to help cover associated costs?

    If you’re buying the house for your own personal use, you’re free to purchase whatever fits your budget and appeals to your senses. If you’re counting on rental income to cover the mortgage, you have to be more conscious of the home’s location and appeal to others. As a rule, vacationers like to escape the home and area they live in when making a rental decision. A colonial or ranch home in the mountains will not typically rent as well as a log home or cute lakeside cottage.

    How you choose to use you second home should be discussed with your accountant. Tax rules on rentals versus private use will vary in most states.

    1. If you plan to rent the home, what are your expectations?

    Rental bookings in this area will range from 80 to 180 nights. If using a rental company, you will be required to make your second home available to your rental company for a set number or days or weeks. This means you will not, in most cases, get to come visit your second home for all the holidays. Management companies make money when your home is rented. If they can’t make money they won’t take on your property. Successful buyers of vacation investment homes are flexible and use their home around the rentals that will pay for its expenses. Rental companies charge between 28%- 32% of the gross rental charge as part of the rental agreement.

    Do some homework. While you’re vacation-home shopping, take a look at similar properties on VRBO.com or AirBnB.com to see how active the rental market is, and how comparable places are priced on a nightly or weekly basis. Bear in mind two homes next door to each other may have as much as 100% difference in pricing. The price differences often are the result of one home’s condition and amenities as well as on-line reviews. From the information you accumulate and the input you can gather from a management company you should be able to make an educated assessment of a home’s potential.

    Next, consider how attractive the home will be to potential renters: Is it close to local attractions, such as the lake, parks or local activities? Does the property have any unique selling points or great amenities? When a potential vacation renter sees your home on-line what will give it instant appeal? If you can’t answer this question, you may not have the right home.

    When going on vacation, renters are looking for a hot tub, mountain views, outdoor spaces, lake access, good family spaces. Also, people who rent vacation homes tend to be larger groups, so you also want to make sure your proposed rental is large enough for your ideal renter.

    Bottom line: Make sure there are a few characteristics that will help your house stand out from others in the area, making it a top choice for renters.

    1. What about property management versus going it alone?

    If renting makes sense, the next question will be whether you’re willing to do all yourself, or if you’ll pay someone to manage it for you.

    If you live within a reasonable driving distance of the home, you’re handy with minor repairs and you have the time, you may be able to do the property management yourself. It also helps if the home you are considering is in excellent condition. An updated or new home will have fewer issues.

    Note that as a landlord your renters will expect to arrive to a clean house, with all amenities as advertised, and a phone number they can call when major or minor problems arise.  You will also need to become familiar with your responsibilities under the North Carolina Vacation Rental Act. http://ncleg.net/EnactedLegislation/Statutes/PDF/ByChapter/Chapter_42A.pdf

    1. Are you rushing into the decision?

    As with any large purchase, make sure you’re not buying a vacation home based purely on emotion or impulse. Research the area and sleep on any big decisions before you make them.

    Before you start you should write down the goals of all the people involved in the purchase. You are probably going to find that during the home search, you will reach a point where some of your goals may need to be sacrificed to achieve others. Decide beforehand, what your end goal is and stick to your plan. By doing this you will become a happier, and better informed second home buyer.

     

    DK Professionals Realty Lake Lure Inc. Is a local owned an operated Real Estate firm specializing in vacation homes and vacation home investments. Our agents are here to help you with each step of the home buying process from education, research to closing.

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