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Thinking of Buying a Second Home?

Not everyone is in a position to buy a home rather than rent, and even fewer are in a position to buy a second home as an investment property. As a result, it can be even tougher to navigate the odds and ends of the investment side of the housing market than it was to finally buy your first home.

If you’re thinking about buying a vacation or rental property, know that you’ll face these financial and logistical considerations.

Financing is more stringent:

FHSA and other mortgage insurance programs aren’t generally available for investment properties, so have a healthy down payment available in order to secure a fixed-rate mortgage. Even if you opt for an APR, you should still put money down to guarantee a lower payment once that mortgage’s true rates are activated in 3 to 5 years.

No Fixer-uppers:
You can’t put off repairs for a long-term investment property like you would at your primary home, mainly because you’ll need to secure renters in order to actually pay the mortgage.

Quick Tip
If the house has issues, they should be easily resolved or you should consider including the cost of any rush repairs in your budget when you’re looking at houses.

Investigate rental costs in the surrounding area:
The obvious goal here is to generate more income from rent than you spend on monthly expenses. Compare average rent vs. the monthly cost of a mortgage and anticipated maintenance. An inexpensive house in an undesirable neighborhood is just as bad as overspending on a property in a better location. Whether it’s a vacation home or a regular rental property, build flex into your rates to avoid eating money during off-season months or for periods of time when you’re in between tenants.

Financing may be tough…but insurance doesn’t have to be:
Homeowner’s insurance covers both your home and your personal possessions in case of unavoidable damages. With a rental property, you’re really only insuring the house. This means you may be able to get some form of landlord’s insurance, which can cover everything from damage caused by fire, renters, and lost rent in some cases. The cost of these plans can be a lot less than homeowner’s insurance.

Cover any liabilities you may have with renters:
A lease isn’t just a document that lists out the price of the house or the conditions of a security deposit – it’s a contract that outlines the responsibilities of landlord and tenant. In the case of a rental agreement for a vacation spot like a beach house, it’s even simpler. You should consult a lawyer and focus on things like liability for damage to your tenant’s property (or requiring renter’s insurance), any requirements you have for renters, and clauses protecting yourself from any civil or criminal legal action.

What you don’t do yourself is out of pocket:

With rental properties, you’re going to have to put in some effort or give up some of the profit. You can require a long-term tenant to do the yard work, but this won’t work on beach houses or other short-term rental properties. Still, you’ll be responsible for anything outside the scope of the tenant’s responsibility. If that’s outside of your grasp, you should set aside part of your monthly profits into a general maintenance fund.