8 Ways You Know You’re Ready To Buy A Second Home

Have you always wanted a home away from home? A sunny escape from the icy winter months in a slice of paradise you can call your own? Buying a second home could very well be the answer you’re looking for — but it’s not a decision you should rush into. There are personal and financial rewards and risks to owning a second home, and you should make sure you’re ready before you take the leap. Here are just a few signs you’re ready to buy that second home.

1. You’ve Found the Perfect Destination

You’ll be spending a significant amount of time at your second home, so be sure it’s in a place where you can see yourself fitting in and being happy. Real estate agents recommend waiting at least five years between buying and selling a house if you want to turn a profit. Get to know the area you’re considering before making the big decision. Take a trip to assess the neighborhoods, culture, activities, businesses, and more — whatever things are important to you in any place you call home.

2. You’re Retired

Time: a second home requires a lot of it, and so do you if you expect to enjoy it! While buying a second home can be feasible if you’re still working, it’s often substantially easier once you've retired and have more flexibility in your schedule and plans. Think of your second home as a reward for all those years of hard work to get to this point.

3. You Have Reliable Income

Not only will you need money upfront for your second home, but you’ll also want to make sure you have a reliable source of income to cover the costs of owning two properties. You’ll be paying two mortgages, two sets of property taxes, two electric bills — two of everything, including upkeep costs.

For retired folks, the money for a second home can come from lots of places. It can come from a pension, savings, or proceeds from investments. If you’ve downsized your primary home in retirement, the profit from the sale can also be a good source of funding for your second home.

4. You Have a Stable Family Life

Investing in a second property that will take you away from your hometown for a good chunk of the year might not be the best idea if you have a family that relies on you, like children with their own young children, or parents with health issues. A second home requires an investment of both time and money, and if your family requires a lot of either of those two from you, it could wind up causing strain.

On the other hand, if your children are grown and independent, and everyone is in good health, a second home can be a way to engage with them and their families during vacations, leading to new adventures and memories that will be cherished.

5. You Have the Money Now

A second home requires money upfront. The upfront costs can add up quickly — just like buying your first home, you’ll have to consider the down payment, private mortgage insurance, homeowner’s insurance, title insurance, appraisal fees, origination fees, credit report fees, and more.

These costs can be higher for a second home, because lenders are often more cautious. They may require up to a 30 percent down payment, and/or evidence of a six-month buffer of reserves for payments on both properties. If meeting the requirements of the lender seems like it presents a hurdle, you may want to reconsider.

As with all investments, if you can afford to make the purchase with cash, it’s likely in your best interest to do so.

6. You Don’t Have Much Debt

Buying a second home is going to add to your debt, so make sure you’re in a place where your debt is manageable. Lenders favor a debt ratio of 36 to 42 percent, so if your second home keeps you in that range, you’re probably safe. Renting out one of your homes can help handle that debt by adding to your monthly income, so tell your lender if that’s your plan to reassure them when they’re assessing you. Keep in mind, though, that rental income is never assured.

7. You Know the Tax Rules

When you own two homes, the bad news is that you have to pay taxes on both. The good news is that you also get certain exemptions on both! Under current tax law, you can typically write off your property taxes and interest, up to a certain amount, as long as you aren’t renting out the property. (If you do rent, but it’s for less than 14 days a year, you don’t have to pay tax on that income.)

That said, if you’re renting out the property for long periods of time, there are other benefits; your interest, taxes, insurance, and other expenses are deductible from that income. And, if you spend less than 14 days a year there yourself, you can write off up to $25,000 a year in home-related losses, including repairs and weatherproofing. Make sure you understand the tax rules and maximize on any benefits they may offer. It’s never a bad idea to speak with a tax professional to ensure you are maximizing your deductions.

8. You’re Willing to Put in Some Elbow Grease

Owning two homes requires a lot of work, but don’t let that scare you. It certainly helps to have a handyman’s touch, but you can always hire help if you need it (and can afford it). When you’re able to work on your second home yourself, it can be a rewarding way to spend your days, especially if you’re retired and looking for a new project to tackle! Many folks, especially retirees, are purchasing condos in communities where a homeowner’s association handles much of the upkeep.

The reward of making a new space your own, enjoying it with family and friends, and ultimately benefitting from the investment makes for a winning combination.