We Stackers are a varied bunch; we each have different goals, passions, callings in life. The one link that unites us all is
our undying loyalty to Neighbor Doug (damn it, Doug! Is The Sizzler still closed, or did Gertrude’s friends finally get that restraining order?) our bond in making smart decisions in our life and finances. While many of us yearn for the day we can hang up our work boots, shirt and tie, or whatever your work attire for good. Others dream of starting a business or inventing the next great technological breakthrough. Still others fantasize about owning a second home – be it for vacation, as a long-term or short-term rental, or a flip. We are going to explore this dream – the dream of how to afford a second home.
Where to start? Have you seen house prices lately???
While it’s true that there has been a huge run up in the price of real estate, all hope is not lost for the savvy Stacker. Let’s eat this elephant one bite at a time.
- You have no debt other than a mortgage on your primary residence, and, maybe, an uber-low interest student loan. If you have any credit card, consumer, or other high interest debt, pay it off before you even consider buying a second house.
- You have a significant emergency fund (over a year’s worth of expenses) in a safe, low-return account.
- Separately, you have a down payment set aside – we’ll touch on how much you need at the ready
- It’s highly recommended that you have money set aside for repairs/general maintenance
When starting your search, begin with a detailed list of requirements, preferences, and “nice-to-haves.” It may be helpful to work with a broker who specializes in second home purchasers, as he/she will have valuable experiences to share with you.
Define the purpose of your second home. Are you thinking about an investment property? A vacation spot? By defining the reason you’re in the market for a second home, you’ll save huge amounts of time and money by avoiding fruitless pursuits. Specifically, this will narrow down your search area. For example, do you live in a high cost of living (HCOL) area and would like to invest in a rental property to add an extra income? It may make more sense to look at buying an investment property in a low cost of living (LCOL) area, find a reputable property manager to handle all the necessary labor and administration, and make it as seamless as possible. If you’re looking for a vacation home, consider what your interests are and where you like to go to get away from everyday life.
How will you pay for it?
Since this is a second home, the rules are somewhat different for financing the purchase from a mortgage on a primary residence. If you have a smaller than 20% down payment set aside, you may be able to get a second home with FHA financing. Before considering an FHA loan for a second home, be absolutely certain that you qualify. If you decide to go on your own, do your homework ahead of time, or hire an experienced real estate agent who specializes in what you’re trying to do.
It never hurts to talk to multiple lenders and get competing offers. Any savings on interest really add up over the span of decades. No matter what you do, be absolutely certain that you can easily afford the additional monthly expenses. Not only will you be responsible for the monthly mortgage and interest payments, but you’ll have to account for property taxes, homeowners insurance, utilities, and other assorted fees.
Make it happen
If you’re truly determined that a second home is in your future, it may be wise to get started sooner rather than later. Unless you’ve been living under a rock this year (in which case, why are you considering a second home?), you know that inflation has reared its ugly head with fury, most recently ticking up to 8.6% annualized for the month of May. Gone are the days of cheap/”free” money. If you haven’t yet started, consider either postponing the second home purchase or get started right away, as the Federal Reserve is predicted to continue to raise interest rates for the foreseeable future.
- Get your financial house in order before considering buying a second home
- Stack those Benjamins in the form of a plush emergency fund and (separately) the down payment
- Research the area/house characteristics that are important to you, based on your desired use for the second home
- Secure financing. Either work with a mortgage broker or interview several lenders to find the one that works best for you.
- Make it happen.