Summer is right around the corner and if you are like most people, you are already dreaming of a getaway to your favorite lake, beach, or mountains. You might even be considering how you could spend more time there. Investing in a second home can be a smart decision if you are looking for a home you will retire to in the future or an investment you can enjoy in your time off while renting it out to vacationers when you’re at your primary residence. Buying a second home is different that purchasing a primary residence. Here are a few things to consider.
Location: The same effort you put into finding the perfect location for your primary residence should go into researching your second home’s location. If you are considering renting the property when you aren’t enjoying it, you’ll want to know how much the typical demand for vacation rentals is and the average rent in the area. You’ll also want to consider the other rentals currently on the market and how other development in the area could impact future rental prospects.
Affordability and Lender Requirements: Most lenders will look at your overall financial situation and expect that you have the financial means to cover both mortgages with a debt-to-income ratio below 41%. They will also expect your credit score to be higher than when you purchased your first home. If you qualify, you may still want to consider how the other expenses of home ownership will impact your budget. Taxes, repairs, HOA fees add up and you’ll need a comfortable buffer to manage these expenses for two properties.
Down Payment: Low down payment programs and government guaranteed loans like FHA and VA are designed to encourage home ownership and are reserved for primary residences. Conventional loans will require a minimum of 20% down payment. If you have equity in your primary residence you may be able to tap into a home equity line of credit (HELOC) to use the money you’ve already invested in your primary residence into your next real estate investment.