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Financing a Second Home
Know tax, insurance issues to sidestep potential problems
By Morris Dye | Published: 11/01/2007
Make sure you crunch the numbers before buying a second home.
If you're thinking of buying a second home, be sure to crunch the numbers first. Here are some tips to make sure your dream vacation getaway doesn't become your worst financial nightmare.
- If you want to avoid higher interest rates and bigger down payments often required in buying a second home, try leveraging the equity in your first home or diverting pre-tax funds from an IRA.
- Consider working with an experienced mortgage broker, rather than one lender.
- Calculate the insurance costs. Many desirable areas have a higher risk of natural hazards such as hurricanes, floods or forest fires. Get several insurance quotes before making an offer.
- Set aside about 2 percent of the home's value each year for maintenance costs. For professionally managed rental properties, expect the management company to pocket anywhere from 20 percent to 50 percent of the rental income.
- If you can't afford your dream vacation home, start with a more affordable and utilitarian rental property close to home. You can build equity and trade it for that dream place in the future.
- Look for a place that can serve as a part-time rental property. Find something you like that you can rent out when you can't use it.
- Learn about local zoning laws, construction standards, development plans and other factors that may adversely affect the long-term investment value of the home you plan to purchase.
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