DavidIf you have your eye on a second home, you may be excited about this new opportunity. It’s also important to be strategic when it comes to your finances. To make sure you’re making the right move, ask yourself these seven questions before buying a second home.
1. What is My Ideal Time Frame?
Picture yourself a few years down the line. Will you still be enjoying your second home, or will you be ready to move on? This is perhaps one of the most important things to think about. Closing fees and other costs associated with buying a second home are not insignificant, but they could be worth it if you plan on keeping your second home for an extended amount of time.
2. How Will This Affect My Taxes?
You’ll have to pay property taxes for your second home, just as you would with your primary residence. While property taxes are tax-deductible, the property tax deduction limit is set at $10,000. Another thing to note is that you’ll owe capital gains tax on any profits you make when you sell your second home.
3. Do I Plan on Renting My Second Home?
Renting out your second home can help you earn money. Plus, you may be able to deduct your property taxes, insurance premiums, and other expenses when filing your taxes, as long as you rent out your home for more than 14 days during the year. On the other hand, you may be taxed on your rental revenue.
4. Do I Have Enough Funds to Pay for Basic Upkeep and Repairs?
Just paying the utility bills can take a good chunk out of your budget. Do you have enough money to pay for any necessary repairs, too? For example, what if the fridge or washing machine breaks down, or what if your roof or driveway is in need of repair? You’ll need extra money to comfortably handle utility bills, basic upkeep, and any unexpected repairs.
5. How Much Will Insurance Cost?
While it’s not required everywhere, most people purchase homeowners insurance just in case something goes wrong. For example, sparks could lead to a fire, a pipe could burst, or a tree could come crashing down on your roof. These situations can be extremely costly if you don’t have insurance. You’ll need to account for the cost of your premium when figuring out your finances.
6. Am I Trying to Make Money on This Purchase?
Are you trying to grow your investment with the purchase of your second home, or are you buying it to make memories? The answer can affect your decision-making process. If you’d like to make a good return on your investment, educate yourself about market trends and desirable locations. Otherwise, simply find a place that you’d love to spend time in. Finding a place of your dreams in an ideal location would be the best of both worlds.
7. Will I Be Prepared to Renovate This Home, if Necessary?
Whether you end up selling your home or keeping it for many years, you may want to renovate it at some point. As you’d imagine, this can be expensive. Ask yourself if you’re prepared to pay for such a significant project. If you don’t have the funds necessary, think about whether you’re willing to take out a loan in order to pursue a renovation.