Purchasing a second home may be a dream come true for many Americans. Whether it is on the beach in a warm tropical climate or in the mountains, owning a second residence is a compelling goal.
Second home ownership has soared in recent years. According to the National Association of Realtor’s Investment and Vacation Home Buyers Guide 2015, vacation home sales exploded to an estimated 1.13 million in 2014 - marking the highest amount since the tracking began in 2003.
Whatever your reason for wanting to own a second home, it is critical to take a close look at the benefits and risks to determine if the time is right to take the step.
First, let’s take a closer look at some of the benefits of second home ownership.
1. Investment Potential
Second homes provide you with the very real potential of being a lucrative investment. Vacation properties are often in popular areas with a limited supply of homes due to geographic restrictions - there is only so much beachfront for home building. Demand can quickly surpass supply creating a rewarding situation for second home owners.
2. Rental Income
Along with the benefits of possible value appreciation of a second home, income can be earned by renting it out. If purchased wisely, the rental income earned during the time that you are not occupying the home can be used to help cover your mortgage and other costs associated with ownership. Having the property “pay for itself” is an achievable goal in some second home situations.
3. Family Unity
There are multiple non-financial benefits to owning a second home, including family unity. Nothing is better than having a second home to build memories with your friends and relatives. Your second home provides a place where everyone can gather and anticipate having fun. Also, having a place to keep your things needed for vacation is incredibly convenient.
Now that we have looked at a few of the benefits of owning a second home, what are some potential risks to consider?
1. Home Maintenance Costs
Many first time second home owners drastically underestimate the costs involved in maintaining a second home. If your second home is rented, for example, there is always the possibility of tenants causing damage. Or if your home sits empty between your vacations, small issues like a water drip can turn into major issues as no one is there to fix them immediately. Be confident that you can set aside enough money for regular home maintenance to help avoid major issues!
2. Higher Credit Scores Demanded
Mortgage lenders consider second homes to be riskier than primary residences. For this reason, higher down payments may be a requirement. Down payments of 20-30 percent or even greater may be demanded and interest rates are often several points higher than for your primary residence. Remember this fact when shopping for a second home.
3. Locked Down
The opposite of having a place to build memories is that a second home can tie you down to doing the same thing every year. Some people may become bored being locked down to the same vacation place year after year. Be sure to conduct some introspection to determine if a second home will cause any negative feelings.
If you decide to purchase a second home, be sure to contact your insurance agent to ensure you have sufficient home insurance coverage.