How to buy a second homeWhile every home buyer’s journey is different, there are some common steps to hit that will help get you on your way.
1. Secure financingGetting pre-approved for a second home is a simple process, with many lenders allowing you to apply online. They look at your financial history, including your current income and debts, to give a rough number regarding what you can afford. At this stage, you're free to consult multiple lenders to find the best interest rates available. Having a pre-approval letter from a lender can give you a leg up when it’s time to make an offer on your dream second home. Be aware, however, that since lenders see financing a second home as higher risk, the loan you’re approved for may be lower than you’re expecting.
2. Find a real estate agentFinding a knowledgeable agent in your target market can significantly decrease your workload in your second home search. You can use their insider knowledge of the area to make an informed decision while letting them coordinate efforts that you don’t have time for. Research local agents online, cross-referencing reviews, and ask for recommendations from locals when possible. The going rate of a real estate agent is 5-6% of the second home’s sale price. So if you’re working with a buyer’s agent and the homeowner has a seller’s agent, each earns about 3%. Commissions are negotiable, so if you find a real estate agent with a rate that’s higher than average, you may be able to talk them down.
|Second home buyer tip|
|If you’re shopping for a Pacaso second home, the steps to buying are streamlined. You can browse home listings by location, price and number of bedrooms.|
3. Make an offerPurchasing a second house will be a familiar process if you’re already a homeowner: You make an offer, negotiate, come to an agreement and prepare for closing. Prior to closing, you will:
- Have a professional home inspector walk through the house. They’ll look for any issues that weren’t previously disclosed so you can make an informed decision regarding your purchase. If the inspection reveals anything major, you can negotiate with the seller or walk away.
- Have a professional home appraisal conducted. Your lender will arrange for an appraisal, which determines the real value of the home to compare it to the listing price. If the appraisal is equal to or higher than the listing, you can proceed with the sale. If the appraisal comes in lower, then you should try negotiating for a fairer price.
- Purchase homeowners insurance. You’ll need proof of insurance before you can close on the second house sale. Compare rates from different insurance providers to find the best rate. Remember to account for local risks, like flooding or fires, that may need to be added on.
- Conduct a final walkthrough. Even though you’ve (likely) already toured the home, you’ll want to ensure it’s move-in ready. The final walkthrough is your fail-safe for avoiding buyer’s remorse.
|Second home buyer tip|
|Pacaso does not retain any shares of the home, giving full ownership to the co-owners. After closing, your owner representative will help you schedule the first stay.|
6 questions to answer when buying a second home
1. Can you afford a second home?Buying a second home is a significant financial commitment, and accounting for all the associated expenses in advance can help ensure your enjoyment of the home for years to come. First, you’ll need a down payment, unless you’re paying cash for your second home. Typically, the down payment on a second home is 10-20% of the purchase price, depending on your credit score, debt-to-income ratio (DTI), and type and cost of the property. This will be applied to the purchase price of your new home.In addition to the purchase price, be sure to plan for these expenses:
- Interest: On top of your mortgage payment, expect the interest rates for your second home loan to be between 0.5% and 1% higher than the going rate for a primary home.
- Property taxes: How much you pay in property taxes will depend on your location. The bank usually estimates your property taxes in your monthly mortgage payment, but if the real amount ends up being higher, you’ll need to be ready to pay the difference at the end of the year.
- Homeowners insurance: The insurance for your second home is also usually more than your primary home, and it will vary depending on if it’s a rental or rarely occupied.
- HOA fees: If your second home has a homeowners association, you’ll need to account for the added monthly expense. HOA fees vary widely, depending on the amenities offered.
- Utilities: Whether you’re using the second home yourself or are planning to rent it out to short-term tenants, you’ll need to budget for monthly expenses. If you plan to have long-term tenants, you might have them pay the utility bills, but otherwise you’ll need to cover these expenses yourself.
- Maintenance: Prepare to pay for lawn care, snow shoveling and the random repairs associated with home ownership. Broken washers and dryers, roof repairs and painting may be rare, but they can throw your budget into turmoil if you don’t have funds set aside.
- Property management expenses: If you live far from your second home, it might not be feasible to handle property management yourself. In that case, you’ll need to hire a property manager to coordinate regular maintenance and handle tenant issues.
- Deduct mortgage interest payments on principal amounts up to $750,000.
- Earn short-term or long-term rental income, depending on local regulations.
- Deduct rental-related expenses if you rent out your home more than 14 days of the year.
2. How will you use your second home?Do you want to buy a second home because you want a summer place to enjoy while the kids are out of school? Are you planning on being a snowbird to escape harsh winters? Or do you want a second home you can visit frequently throughout the year? Your answers will help you choose the second home that’s right for you. If rental income is a primary motivator, now is the time to decide if — and how often — you might want to rent out your second home. You’ll need to verify rental laws in the area where you’re looking to ensure short-term rentals aren’t banned.
The pros and cons of buying a second home to rent
|EARN ADDITIONAL INCOME TO OFFSET EXPENSES.||YOUR PROPERTY SUFFERS MORE WEAR AND TEAR.|
|AVOID ISSUES THAT ARISE FROM NEGLECT.||YOU HAVE TO MANAGE RENTAL LISTINGS.|
|TAKE ADVANTAGE OF TAX BREAKS.||YOU’LL HAVE MORE MAINTENANCE AND HASSLE.|
3. Where do you want it to be located?Once you decide on how you’ll use your second home, you can hone in on the perfect location. It’s tempting to go with your favorite vacation spot, but there are other important factors to consider before you start house hunting. First, how often will you be there? If your second home will be a frequent weekend getaway, you’ll want something within driving distance of your primary residence. If you’re only planning to use it for longer stays a few times a year, then something farther away could work well. Second, budget is a factor in the location you choose — and not just because of real estate prices. The farther away your second home is, the more challenging it will be to manage it, so you might need to rely on a property manager. Distant locations will also require higher travel costs, and locations that are prone to natural disasters — like beachfront property vulnerable to hurricanes — will cost more to insure. Lastly, a second home in a desirable destination with warm weather like Palm Springs or year-round adventures like Lake Tahoe is likely to stay rented and sell more quickly than one in a more remote location. It will cost more to buy a second house in desirable locations, but they are also usually easier to sell down the road.
4. What type of home do you want?Single-family detached homes are usually what comes to mind when talking about a second home, but townhomes, condos and co-ops are also popular choices. These alternatives might be smaller, but they usually cost less, offer more amenities and are less expensive to maintain.Think about the value a pool, exercise room or nearby resort would add to the property. While any one of these home amenities can be enough to push a detached home outside your budget, all of them can be attained in a multi-unit building.
5. Do you want to be the sole owner?Buying a second home doesn’t have to be a solo endeavor. Joint ownership can increase your buying power and reduce the maintenance and management burden of a second home. Since you’ll only be using the property at set times throughout the year, co-ownership isn’t the inconvenience that some make it out to be. You can choose to invite one or more friends or family members to share ownership with you and use a lawyer to draw up an agreement.
|Second home buyer tip|
|Pacaso’s fully managed LLC co-ownership model simplifies joint ownership of luxurious second homes in highly desirable destinations. The Pacaso team brings together up to eight vetted co-owners to buy a home using a property-specific LLC. With Pacaso, you can enjoy a streamlined, transparent purchase process of a fully managed second home.|
6. What is your budget?Lenders see second homes as higher risk, so second home loans have a few key differences from first mortgages. Some financial notes to be aware of about buying a second home:
- There are fewer options for financing a second home. You won’t be able to use a Veterans Affairs (VA) loan or Federal Housing Administration (FHA) loan to make your purchase.
- You need to pay that larger down payment. If you don’t have at least 10% of the second home’s cost on hand, you’ll struggle to find a lender. If that wipes out your savings, you’ll be at a disadvantage when repairs need to be made.
- There are higher credit score requirements. The lowest credit score lenders will typically approve is around 725.
- Be mindful of your debt-to-income (DTI) ratio. Your DTI ratio includes all of your current debts, plus added debt of the second home. So if you’re still making payments on your primary home’s mortgage, your DTI can easily exceed the 43% limit most lenders have for applicants.
- Prepare for higher interest rates. Adding an extra 0.5% to a normal mortgage may seem small, but it adds up over a 30-year period.
|Second home buyer tip|
|If you choose a co-ownership LLC through Pacaso, you can apply for second home financing offered by one of our banking partners. Pacaso serves as a corporate guarantor of the loan, vetting qualified buyers and protecting you if a co-owner defaults.|