Working with bankruptcy, I see many clients who have purchased second homes in anticipation of retiring or having rental income that were not prepared when financial mayhem came their way. Buying a second home is something that many people dream about; however, dreaming about and actually doing the planning to buy a second home are quite different. When planning to purchase a second home, people must consider much more than location or floor plans – – they must consider how they will pay for this second home and what they will do if their income is reduced or completely cut off.
Rental Income? As your first step in planning to purchase a second home, consider why you are purchasing this home. If you plan to rent this home for additional income, you want to consider the neighborhoods that have the best market for renters. A professional realtor specializing in investment properties will be beneficial. In addition, as a landlord there will be risks and liability that you may not realize. Therefore, if buying a second home is purely for investment and income, consult with an attorney to determine what steps to take to protect you from liability. One too many times I have had clients sit across from me because they thought rental homes could give them a better income only to discover they were not prepared to be a landlord.
Tax Implications? How will purchasing a second home effect your tax liability. Another mortgage can help you by giving you additional interest to deduct at tax time; however, remember you will have property taxes to pay depending on where the property is located. Another thing to consider is that rental property or second homes are usually taxed at a higher rate than homesteads. Check both your income tax consequences as well as potential property taxes when considering buying a second home.
Financing? How will you finance this second home and will you be able to fund the payments for the term of the loan? This question may be the most serious one to answer when deciding to buy a second home. In order to properly answer this question, you must first analyze your current financial health – – what is your current monthly income, monthly expenses, your assets and your liabilities. Determine what amount, if any, can be prudently put toward a mortgage on a second home. Then, research mortgages to find the best interest rate and terms. Another consideration is the term of the loan – can you afford a 15-year mortgage or will a 30-year mortgage make the payments more affordable in the long term. Always allow for a cushion in your monthly budget for unexpected expenses before determining the amount you can afford for a second mortgage payment. Also, remember there will be unexpected costs associated with your second home that will require budgeting and planning.
Expect the unexpected! Unfortunately, even the best-laid plans fail; therefore, you must plan for the worst-case scenario. What happens if you lose your job, become ill or face some other dilemma that prevents you from paying the mortgage and/or expenses for your second home? Planning and preparation can decrease the risks of losing your second home to foreclosure; however, you must take steps to prepare as soon as you buy a second home. Mortgage insurance that will pay the mortgage payments if you become ill or lose your job may seem like a waste of money; however, it is relatively inexpensive and may keep you from losing your investment should something happen. If you have decided to purchase property near the coast, flood insurance or storm insurance may be needed whereas your residence never needed such insurance.
Probate issues? For those of us planning to buy a second home later in life, we must consider how this will affect our probate estate. Will the mortgage be paid in full or will we be leaving our heirs a debt-laden home? Again, insurance that pays off a mortgage at death may seem like a waste when you are younger; however, seniors planning to purchase a second home may want to consider this type of insurance. Furthermore, what will be the tax consequences to the probate estate of adding an additional asset? Meet with a qualified probate attorney to discuss how to plan for this asset and if the home should be titled in such a way as to bypass probate if possible.