Before you sign on the dotted line, pack up for San Diego, and break out your favorite moving tips, there are a few more things to keep in mind. Since this is your second residence, your mortgage situation will look a little different. There are also additional considerations since you won't be spending 365 days a year in the new house. The big thing to think about is what will happen to the house while you're not there. Will you rent it? Even if you don't, you have to think about upkeep when you're not there to dust and wash the windows in person.
- Second-Home Mortgage
Unless you have enough cash on hand to pay for your second home out of pocket, you're going to have to get a second mortgage. Here's the thing: depending on who you ask, your house payments (including your mortgage, taxes, etc.) shouldn't cost more than 35-45 percent of your pre-tax income. If you're looking at a conservative estimate, it shouldn't be more than 25 percent of your take-home income.
Regardless of how conservative you want to be with your money, the ratio is consistent regardless of how many properties you own. There's also the fact that second mortgages are generally viewed as a higher risk.
The best approach is to talk to several lenders about your options and keep in mind that there may be a significant disparity between how much you're comfortable paying each month and how big of a loan you can qualify for.
- Rental Strategy
If you're like most second-homebuyers, you're looking to earn a rental income through your second property. If this is the case, you need to figure out your rental strategy early on.
The easiest way to do this is to figure out what you'd like to earn in rental income from the property each month, and then take a look at rental prices in the area to see what you can reasonably charge for your property.
At a minimum, your rental income should equal the amount you have to spend on the mortgage and other expenses. If you can't meet that cost, then consider purchasing a cheaper house.
- Taxes
As the old adage goes, only two things are certain: death and taxes. Fortunately, there are a few tax breaks on second residences to make your life a little easier, such as the ability to write off property taxes on your second home.
There are a number of deductions and tax credits you may receive on your first home that won't apply to your second. Rules about property tax deductions on second homes also vary based on what state you live in and how often you use the second residence for personal purposes.
If you're planning on infrequent renting, good news: If you rent out a property for less than two weeks of the year, the income is tax-free. If you rent it out longer, you'll need to declare the income and pay taxes on it.
The best approach here is to talk to a tax professional. They can walk you through the details of the tax code and let you know how your second residence will affect your tax situation.
- Extra Expenses
Finally, you can't purchase a second home without considering the extra expenses associated with it. What other extra expenses? Think about all the extra money you spend on your house throughout the year: redecorating, renovation, but also basic maintenance and upkeep. There's also homeowner's association dues if it's somewhere with an association, and possibly a second insurance policy.
When you take a good look at your finances, be realistic about how much you can afford to pay for these additional expenses. Otherwise, you may still be losing money on your second home.
The opinions expressed in this article are those of the author and do not necessarily reflect the position of RISMedia.
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