What to know before buying a second home

Log cabin by a lake

Whether you picture a desert villa, lakeside cottage or urban condo, owning a second home is a significant – and exciting – financial goal. This investment can serve as a vacation retreat, investment property or both. Regardless of how you plan to use the property, it’s beneficial to understand the potential financial impact of owning two homes. 

Here are three things to consider and discuss with your Ameriprise financial advisor before purchasing a second home. 

1. Your current financial situation

Before you start searching for properties, review your complete financial picture. Meet with your financial advisor to review this goal and how it fits into your overall financial priorities. Together, you can discuss important questions, including:

  • If you’re still working, are you on track to meet your retirement goals? If you’re already retired, will your projected income cover the expenses of a second home?
  • What is your debt-to-income ratio today? What is it projected to be with the addition of second home purchase?
  • How much do you want to spend on a second property? If you’re not paying with cash, can you make a 20 percent down payment to secure a better interest rate and avoid mortgage insurance?

Consider the financial benefits and risks of owning a second home and how this investment may impact your long-term financial goals. 

2. The broader financial impact

Purchasing a second home, either with cash or through a mortgage, is only one portion of your financial investment. Take into consideration the monthly costs associated with owning another home, including homeowner’s insurance (and possible flood insurance if your second home is near water), utilities, maintenance, HOA fees and furniture purchases. 

You may also want to allocate funds for traveling to and from your second home and purchasing bigger ticket items, like a boat or second vehicle, for the second property. An understanding of possible expenses can help you during the decision-making process. 

3. The intricacies of owning a rental property 

While renting your second home can be a way to generate extra income, managing a property can be complex. Though they can be expensive to work with, property management companies can be helpful partners if you don’t live near your second home or have limited time to maintain it. If you decide to manage the property yourself, ensure that you understand the rules of renting a property in the city or municipality where your second home is located. Regardless of how you manage the property, build some flexibility into your budget as income from renters can fluctuate. 

Renting the property may also increase your homeowner’s insurance and could have an impact on your taxes. For example, rental payments typically need to be reported as income if you have renters for more than 14 days per year. Rules can vary from state to state and be quite complicated, so enlist the help of a tax professional to navigate them properly.  

Working together to achieve your goals

If you’re considering owning a second home, evaluating the risks and benefits can help you make an informed decision. Your financial advisor will help you assess how owning another property fits into your complete financial picture. Together, you can review the considerations and decide on the steps to help you reach this goal.