Expert Insights on Buying a Second Home: Vacation, Investment, and More
Why Buy a Second Home: Understanding the Motivation
Over my 40 years as a real estate broker in Chicago, I have referred hundreds of clients looking to buy a 2nd (or 3rd, 4th, etc) property to use as a family vacation home, investment property, or combination of the two. The motivations for such a purpose vary greatly. Perhaps there is a desire for a place where the extended and growing family can come together. Maybe you want a home in your favorite vacation destination where you spend a few weeks a year and wish to rent the home when not there. Or, you want a pure investment as a VRBO or Airbnb.
The Benefits of Owning a Second Home
The benefit of buying a second home in your favorite vacation spot is to build equity in a real estate investment located in a place you love and if not for owning the home you would spend money on a hotel or rental property. If you do not use the home for the entire ‘season,’ you can rent the property for the added benefit of someone else assisting in the cost of ownership. This is a win-win; you have a home that is tailored to your style and family needs, in a place you love, and the added benefit of income contributing your overhead.
Assessing the Risks: Investment Considerations
Buying such a home for a short-term investment with no intention of using the property can be risky. Is the location one that you are certain will see a growth spurt? Is the location or condo building one that currently does not allow short-term rentals but you have knowledge the VRBO or Airbnb rules are about to change to your advantage? What if the current city or township rules allow short-term rental properties such as Airbnb but could be changed by a community vote? Does your spreadsheet show an alternate plan such as a 12-month rental scenario? Do the numbers work? It is critical to set your goals and expectations out of such an investment.
Financing Your Second Home: What You Need to Know
Financing a non-primary residence or investment property typically requires a minimum 20 to 25% downpayment. Interest rates are typically ¼ to ½ % above the rates for a primary residence. It is critical to work with a lender that is familiar with financing non-primary residences. The qualifying factors for such a mortgage are complicated and depend on a multitude of factors. If the property is to be used exclusively for personal use with no rental income, your debt-to-income ratio will be significantly different from a scenario where you will collect rental income that is used to offset expenses.
The Role of a Real Estate Broker in Purchasing a Second Home
Of critical importance is to find a real estate broker who can help you with the purchase of your second/third/fourth home or pure investment property. Start with asking your local real estate agent who she would recommend. I work with clients looking to buy or sell homes on the near north side of Chicago but have found excellent agents to assist my clients in over 20 cities across the world.
Understanding the Full Cost of Ownership
It is important to factor in the potential costs of ownership outside of the mortgage, taxes, and association fees. Do you need on retainer or speed dial a home manager, landscaper, handyman, or pool service? Who do you call when your ‘tenant’ sends a text at 2AM that the heat or AC shut down? Who do you call when in ‘residence’ and your pool heater shuts down or your street and driveway are not shoveled after 12” of snow?
The Pros and Cons of Buying a Second Home
A smart investment in a vacation home will yield an excellent return; you enjoy a beautiful home with your family plus the benefit of a tenant helping you pay your mortgage; your investment in a stock or fund will not give you this double advantage.
Like any important investment decision, you need a team of advisors who fiercely protect your best interests.
For more information and personalized advice on purchasing your next property, whether it’s a second home or an investment, contact Debra for personalized guidance.
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