People have a variety of reasons for wanting to buy a second home; some people may want a vacation escape, some may want to earn an income from renting out homes and others may want to buy a house that needs to be "refurbished" for their retirement. If you are thinking about buying a second home for any reason, you should weigh all the pros and cons before committing to another mortgage loan.
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Part 1 of 3: Deciding if Buying is Right for You
Step 1. Look at the market to buy
Are house prices currently cheap or expensive? Try looking up a graph of household income to house prices and see if the city you're looking for has a high ratio relative to other cities. Note that some cities such as New York and San Francisco may be historically immune to similar ratios.
Talk to one, or several, real estate agents about the relative prices of homes. Even if you don't get a definitive answer (it's hard to gauge whether the home market is cheap or expensive, because the information isn't always clear-cut), you may get clues about certain markets to watch or even homes that are selling well. This information is valuable
Step 2. Assume that you will not be able to rent out your second home
Is a second home still a safe investment without the rent supporting the list of expenses? Otherwise, you should seriously question the decision to buy a second home. Too many families buy overpriced second homes, betting that they'll be able to rent them out when they're not living in them. When renting becomes unfeasible, impossible, or yields far less than expected, homeowners find only a failed investment.
Step 3. List possible costs
List all the possible costs of owning a home. Can you fit all of these costs into your budget while still leaving some space? Yes, you'll be building equity with a second home, but if investing in a second home is keeping your money tight each month, you might be better off waiting until you've paid off your first mortgage loan, for example. Here are some possible costs to consider:
- Property tax. Different in every country; the average annual property tax in Los Angeles is $1,200 for a $100k home, or 1.2%. If property taxes in the city you're considering are very high, check real estate taxes in neighboring cities. You can save a lot of money on real estate taxes by simply buying a house in a city near your desired location that doesn't have a high tax burden.
- Basic accounts. This should be much lower if the house is unoccupied for most of the year, but it shouldn't be neglected.
- Repair/maintenance costs. Homes are living things - they grow, get old, need help. Consider the costs of renovations and regular maintenance services, such as landscaping. The yard and garden of the second home must be maintained if there is a tenant, or if you are absent for part of the year. In the summer months, wild weeds and uncut grass advertise that the property is uninhabited. In cold climates, driveways and walkways that are not cleared of snow are an invitation to vandalism or theft.
- Increased insurance. Insurance costs may be higher because the property has not been occupied for several years or because it has been rented out.
- Property management services. The property management company should factor into a big cost factor in your calculations, especially if you are buying a second home very far from your main residence. If you are renting out a property, you will have to arrange for someone to provide emergency repairs to your tenant. If you have a secluded vacation home, you'll want to make sure someone can check for frozen pipes or a leaky roof or any possible damage to the home during your absence.
Step 4. Don't just rely on the same tax credits you might get for your first home
Check with the IRS (or the DGT in Indonesia) to find out what the tax implications for second homes will apply. For many people, the second home ownership tax costs more than the tax credit, especially if you live in the home for more days than the number of days you rent it out.
For example, if you rent the house for less than 14 days, you don't need to include that income. If you live in the home for fewer than 14 days a year, your property is considered a business, and up to $25,000 a year in deductible losses
Step 5. Consult a CPA (public accountant) or tax consultant before you start looking for a second home
A public accountant or tax consultant will be able to provide you with accurate and up-to-date information on tax write-offs, loans, interest rates, etc. For example, you might be able to estimate a more expensive mortgage loan, with a higher interest rate, regardless of your credit history - second homes usually just cost more to get.
Part 2 of 3: Taking the Right First Step
Step 1. Consider first renting in the area where you plan to buy
Many people make the mistake of buying property in a market where they know nothing and which, in the end, they don't really care about. Even if you plan on using your second home as an investment and renting it out, it should primarily be a place where you can see yourself living there, even if only for a few weeks a year. Rent in the area for at least a little while to make sure you are comfortable living there.
Step 2. Talk to the locals and be one of them
Find out what the locals of the area like; where do they think the future of the area is; how long have they lived there, etc. The locals can give you a great view of how life in the area is. Use this information to determine if buying a property there is a good long-term investment.
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Be a local too (when you rent a moment) so you can investigate some of the factors that will increase the value of your potential home:
- Distance to a good school
- Reliable and extensive transportation options
- Choice of places to shop
- The distance to the hospital, and also the presence of the police station and fire department
- Low crime rate
Step 3. See how much “comps” cost in that area
Comps, or comparable home prices, should give you a good idea of how expensive homes generally are in the area. You can speak directly to a real estate agent to get data on comparable home prices. The key to comparable home prices is to look at the selling price, not the listed price. Use comparable house prices for a rough guide - just because a 4 bedroom and 3 bathroom home on the same street sold for $575,000 (7.6 billion rupiah) doesn't mean a 4 bedroom and 3 bathroom home is what you want too will have the same price.
Step 4. Begin familiarizing yourself with the responsibilities of the landlord if you plan to rent it out
If you are looking to rent out a second home and build equity, it is important to know what is expected of you. Don't put yourself under the threat of the law by being lazy or ignorant - you'll get stoned. Here are just a few things you should start looking into as a potential rental home owner:
- Learn how to expel a tenant or terminate a lease.
- Study your state's laws regarding security deposits, what can be covered - cleaning, unpaid rent, excessive damage - and cannot be covered - furniture upgrades, normal damage, repairs - by it.
- Learn how to structure a rental application and the tenant selection process. Anti-discrimination laws legally require you to follow applicable rules.
- Know your duties regarding routine repairs and maintenance.
- Protect yourself from liability for tenant injuries. You can be held liable for any serious accident involving a tenant for which it is the tenant's responsibility to protect themselves against it or fix it as quickly as possible.
- Know the list of tenants' rights, especially regarding privacy. In most countries, you must give the tenant 24 hours notice if you intend to repair or show the property, except in an emergency.
Step 5. Get a real estate agent
A real estate agent, with at least 5 years of experience in your desired area, will be your adviser throughout the buying experience. A real estate agent will help you narrow down your home search until you have crossed out all but the best. Then, after completing your purchase, a good real estate agent will keep in touch with you after the sale. This becomes very important for homeowners whose main residence is very far from their second home.
Part 3 of 3: Finishing the Agreement
Step 1. Ensure financing before you decide on a home
Getting an appraisal and then having a mortgage loan ready for use will let you know what type of home you can afford. Since this will most likely be a number 2 mortgage loan, be prepared to pay higher interest rates and you will likely only qualify for a smaller mortgage loan. Once you know for sure the total budget you get, set aside money for a down payment.
- In order to get the best second mortgage, lenders will often look for a debt-to-income ratio (DTI) below 36%. This means that your total debt, including your first mortgage loan, should only be about one-third of the amount you earn each month. For example, a cash owner with an income of $7,000 (92.5 million rupiah) per month and a debt of $2,500 (33 million rupiah) has a DTI of 35%.
- Be prepared to pay 20% of the purchase price. This money will have to come from your personal savings or current residence equity. You might also consider borrowing from your life insurance or retirement fund.
Step 2. Make an offer
Make an offer on the second home you want. Be prepared to make several bids that will eventually outperform others before you reach that final bid.
Step 3. Take steps to start protecting your new home
A second home is an investment, so you'll want to make sure you go the extra mile to protect it. Here are some things you can do to keep your assets up-to-date:
- Get a home inspection before purchase. You want to be aware of any problems or defects that the seller may not have addressed prior to the sale.
- Get ownership insurance.
- Get damage insurance (earthquake, flood, fire, etc.).
Tips
- Contact a real estate agent in your area of interest. Ask them about properties for rent in the area. It's also a good idea to ask about the local economy, as it can have a big impact on property values.
- There's nothing wrong with making friends with local law enforcement and neighbors in the area where you're planning to buy a second home, especially if you won't be occupying the house often. If your neighbors know or have met you, they will be more likely to contact you if they notice something is off.
- Read books on becoming a rental home owner if you think you'll want to rent out your second home. Find out local and state regulations before renting out your second home. Rental homes will have to meet all safety rules, including embedded smoke alarms and two exits. Things like that may seem small, but unless you're very skilled, you'll have to pay a professional to make repairs and installations on your second home if it doesn't meet all the security and zoning requirements.
Warning
- You should consider getting a higher limit on damage insurance for a second home, even if a higher limit is not requested. You won't be in your second home all the time, so you'll need full insurance for fire, theft, other natural events, such as flooding and wind damage.
- It's a good idea to think about adding additional contingency insurance, especially if you're planning on renting out your vacation home to someone else.
