Planning on a second home? Maybe an investment or rental? Vacation or Home Away from Home? Whatever the reason, many people just don’t know where to start. Here are some great starting points and tips for buying a second (or third) home in the Scottsdale Arizona real estate market.
First you have to decide if buying a second home makes financial sense to your current and future needs. Are you planning on using it for investment purposes? Cash flow income or as a second home for yourself? Remember that you will have ongoing expenses once you own a second home. Not only will you have to take care and maintain your primary residence but the second home as well. You will also have taxes and homeowners insurance that you’ll need to tack onto a mortgage payment if you’re planning on financing the property.
Secondly, look into the tax implications by having a second home. You may need to worry about income tax if you’re renting the home and property taxes. You may be able to deduct mortgage insurance or mortgage interest if the interest goes beyond the standard deduction. You might also consider purchasing a home in a different town as it can affect your property tax bill. If you’re planning on renting out the home but using it as a vacation property some days out of the year, you’ll need to figure out what it will cost in income tax versus how many days you’ll spend the balance the timeout.
How are you going to finance the property? Many people will come up with a large down payment or refinance their current home and pull out cash for a down payment and finance the rest. The higher the down payment the lower the interest rate and the more home you can technically afford. You should have at least 20% of the purchase price in order to get a conventional loan on a home that will not be your primary residence. You can borrow money against a life insurance policy, refinance a car or cash out a 401K if it makes financial sense to you both now and in the future.
Do you qualify for a second mortgage? Guidelines for purchasing vacation homes are more lenient than those for investment properties as you will be occupying the home yourself most of the time. Down payment requirements may also be more relaxed if you’re planning on occupying the home yourself. However, you will need a larger down payment for the purchase price depending on the lender. A higher credit score means a lower interest rate and a general rule states that you’ll need at least a 750 credit score in order to purchase a second home for investment purposes.
Are you planning on investing for rental purposes? If so, you need to consider all the implications of being a landlord. Will you have a property manager? Will you manage the property yourself? Will you pay for any homeowners association or utilities? You need to make sure that the investment is worth your time and money. Are you getting enough on a cash flow basis in order to maintain and actually make money? Are you going in debt every month or paying off the mortgage in a reasonable time?
Lastly, you want to protect your second home. Whether you’re planning on retiring in this home or simply hanging onto it for several years and then reselling it, protecting it while you own it can preserve your investment for years. Make sure you have proper homeowners hazard insurance to protect the property from theft, fire, flooding or storms. (You may need additional insurance for flooding depending on the policy). If you’re planning on renting the home out you want to add additional liability insurance for accidental injuries to any visitors or renters.
If all of the numbers make sense and you feel that this is a good investment for both now and your future, give me a call. If you’re unsure and need to run some numbers on a particular neighborhood or home, give me a call. We can run the numbers, find out what makes most sense for you financially and how we can get you the right second home or investment property for your needs throughout the Scottsdale real estate market.