Cody Sims: Questions to Consider Before Buying a Second Home
The purchase of a second home offers interesting possibilities. It may be a place where you plan to create lasting family memories – or it will be your quiet refuge from the hustle and bustle of everyday life. Whatever your vision for the property, it is important to determine if you are ready to commit.
Here are some questions to help you determine if you are ready to take on this additional financial obligation.
Why are you buying a second home?
You may be looking for a weekend getaway just for you and your family. Or maybe you want a rental property that generates income. There is no right or wrong answer, but how you use the property will have financial implications. You will want to understand how these distinctions will affect your property taxes, insurance requirements, and income taxes, including capital gains tax at the time of sale.
How will you pay for your second home?
Buying cash avoids lender fees and the burden of a monthly mortgage payment. But it also makes your money less accessible in an emergency. Financing your second property also has its drawbacks. Lenders tend to require large down payments on second mortgages. Mortgage points, closing costs and prepaid escrow add up. And you’ll have another mortgage payment to manage each month.
What additional costs will you incur?
Think beyond property taxes and insurance. You may need furniture. You can consider home improvements. Even if you are a handyman, you will need materials and permits. Your second home will generate monthly utility bills. You may have homeowners association fees. If you’re buying waterfront property, expect higher insurance and maintenance costs, as well as the added cost of watercraft. Assuming you don’t live next door to your new property, you will have round trip travel costs.
How will you handle maintenance?
Homes need maintenance, inside and out. If you become a landlord, your tenants will expect quick fixes when the washer goes out or the drain backs up. Be prepared to pay someone to keep an eye on the property even when it’s empty. Property management brings peace of mind but can be expensive.
How will a second home affect your taxes?
You may be able to deduct interest payments, property taxes and points on a second mortgage if you meet certain conditions. Rental income may be subject to income tax. You’ll need a tax expert to help you navigate this complex subject and set your expectations.
How does this purchase fit into your financial plan?
If your priorities are in order, a second home can fit right in with your long-term financial goals. Do you make regular contributions to your retirement account? Do you have minimal debt? Do you have a substantial emergency fund? Is the college fund increasing? Answering yes to these questions can mean that you can safely start buying a second home. For a second opinion, consult your financial advisor to determine if the condominium is financially attractive for you and your family.
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Cody Sims, CRPC, AAMS, AWMA, is a financial advisor and franchise owner at Ameriprise Financial Services, LLC. in Chattanooga, Tennessee. He specializes in fee-based financial planning and asset management strategies and has been practicing for 27 years. To contact him, ameripriseadvisors.com/james.e.sims, 423-648-2900, and 412 Georgia Ave., Suite 210, Chattanooga, Tn. 37403.
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