Just when you thought your first home could more than suffice, an opportunity opens where you can get a second one. Then, all kinds of possibilities start to run in your head: a vacation for family and friends, a rental property to generate additional income, a sanctuary where you can recharge yourself — the list goes on!
Before letting your imagination run wild, backtracking a little and planting your feet back on the ground will bring you to the next phase of your decision-making process – weighing the consequences. Reality will warn you that you’re still paying the mortgage on your first home or you have other pressing financial priorities. Then, of course, there’s the ongoing pandemic that’s keeping people more cautious about where to place whatever funds they have in their hands. Thus, a second house may seem like an unnecessary luxury.
Consider the following factors as you decide whether to get a second home or not:
Factor #1: Purpose or intended use
Several buyers who seek out a second home often use it as a place where they can relax and unwind with their families when things get hectic in the city.
A second home becomes more appealing when health and wellness are your top considerations. Breathing in the fresh air, admiring the gorgeous views of the natural landscape, and cooking outdoors — to name a few activities — can do wonders for you.
Alternatively, a second home can also be used as an income-generating asset.
It can become a rental property for long-term tenants or a vacation property that attracts a steady stream of recreational travelers.
Factor #2: Finances
Ask yourself this: Is it financially feasible for you to buy a second home? To answer that question, you need to examine your finances and assess whether or not you can afford to do so — an often repeated, yet crucial tip for buying a second home.
Here are other finance-related aspects of this endeavor that you should ponder on:
- Paying in cash can mitigate risks down the line. If you have enough money for this, consider paying for your second house with cash. In doing so, you’ll be freed from the burden of paying for two mortgages simultaneously. You’ll only have one mortgage to include in your monthly budget allotment and you settle the transaction for the second home almost immediately.
- Leave no stone unturned when going through mortgage options. If you see the need to secure a mortgage for a second property, make sure first that you’ve looked at all your options and that you fully understand the costs and interest rates involved.
An important aspect to consider is the debt-to-income ratio. Most lenders prefer lending to a client whose debt doesn’t exceed around 36% of their monthly pre-tax income.
To help you in examining your mortgage options, seek the assistance of a real estate agent, particularly one who specializes in the secondary homes market. That way, you’ll be more confident in making decisions.
Factor #3: Taxes
There are several options available to you in the aspect of taxes. These will depend on how you intend to use this second property. Let’s take a look at the following scenarios:
- A second home as personal property. If the property is treated as a secondary home or vacation getaway for you and your family, taxation will be similar to that of your first house. Major expenses like mortgage interest and property tax will be the same. As far as the government is concerned, the house is only intended for personal use.
- A second home that’s mostly used as personal property. If you rent out the property to guests for less than 14 days per year, the IRS will still consider it within the bounds of personal property. And you don’t need to pay taxes on the rental income stemming from the short-term vacation stay.
- Using a second house as a full-fledged rental property. The moment you start renting out this property for more than 14 days per year, the government will classify it as a commercial/rental property. Income from this set-up will be taxed. However, you still have the option to deduct some expenses from your tax bill. For instance, costs associated with utilities, property repairs, and maintenance can be used to offset the total amount you need to pay.
Factor #4: Finding the ideal neighborhood or location
As this is a secondary property, there’s no need to rush to a decision. Take your time in looking for the best place for a second home. There are a number of viable properties to examine in the secondary market, from rest houses and cabins nestled in thick forests to lakefront homes and beach houses with captivating views of the sunset.
If you’re in the market for a second home in the form of lakefront property, get in touch with Fazzone & Harrison Realty LLC at 860-307-7203 / 860.354.0479 or send an email to kharrison(at)fazzoneandharrisonrealty(dotted)com. As experts of secondary properties, we’ll help you find stunning water and lakefront vacation homes throughout the counties of Fairfield and Litchfield in Connecticut.