For most people, a home is the largest investment of a lifetime. So, buying a second home isn't something that happens without careful consideration and planning. Whether you're looking for a vacation home, a property you plan to rent or the home where you'll retire, you'll need a solid strategy for purchasing the home and for managing the property once it's yours.
I've worked with many buyers who are looking for their second homes, especially around Smith Mountain Lake, and the challenges vary, depending on the planned use for the home and the financial situation of the buyer. If you're even contemplating buying a second home, consider these questions:
Can you afford it?
This seems obvious, but it's really the most important question. Have you carefully reviewed your finances? Can you buy a second home without causing undue stress on your budget? In addition to whatever mortgage you may carry, you need to be prepared to pay these expenses:
- Real estate taxes
- Homeowners insurance (premiums are generally higher than for a primary residence)
- Water, trash, electric
- Homeowners association and/or property management fees, if applicable
- Home repairs and general maintenance (as a rule, figure about 1 percent of the home's purchase price)
- Snow removal, lawn care and other landscaping services
Where — and what — will you buy?
As with any property purchase, you need to carefully consider the location of a second home and buy with an eye toward resale. If you plan to use the home yourself, make sure it's close to amenities you need and want and check out the cost of living in the area. If you're buying a home for your retirement, consider one-level living or a home that's easily adaptable should you develop mobility problems in the future.
When buying a rental property, look for anything that might make the home difficult to rent. Find out about any laws governing rentals in the municipality where the house is located. Research the going rental rates in the area to make sure the market will bear the rent you need to make to cover costs. Take into account the cost of any immediate repairs or upgrades you'll have to make before taking on a tenant.
What are the tax implications?
If you use the home as a personal residence, you can deduct mortgage interest just as you do for your primary residence, and property taxes. If you rent the property for fewer than 14 days a year, the IRS still considers it a personal residence. Not only can you take the cash tax-free, no matter how much you charge, but you can deduct mortgage interest and property taxes. If you rent for more than 14 days, you'll need to keep track of the number of days you rent it versus the number of days you use it yourself. That determines whether the IRS considers the home rental property or a personal residence. If it's deemed a rental property, you'll be required to claim the revenue as income, but you can deduct rental expenses. No matter your situation, it's a good idea to talk with your tax advisor before taking the leap.
How will you manage the property?
As a homeowner, you know the maintenance and care a home requires. Will you take that on for a second home or hire it out to a property management company? If you plan to hire a property manager, interview multiple companies about their business and policies. How do they screen tenants and collect rent? What's their marketing plan for your property and how long do the properties they manage typically remain vacant between rentals? What maintenance do they perform regularly and how do they respond to maintenance requests from tenants?
Second-home sales are on the rise, with with vacation-home sales in 2015 at their second-highest level in a decade. There's a lot to consider, but there's so much more to be gained if you do your research and plan carefully. I'd love the opportunity to talk with you about your plans for a second home. Call me at (540) 353-0123 or email me at sonya@sonyadickinson.com. Browse my listings here and be sure to like my Facebook page.
