Should You Purchase A Second Home?

By April 14, 2015Life Coach, Loan Talk

Should You Purchase A Second Home?

Finishing residency and starting your practice is a very exciting time, and often a time physicians begin looking to purchase a home. After years of schooling you are finally earning a respectable income and with that comes the perks of being able to borrow against that income for a home, or two. Living in an area with a modest cost of living might afford you the ability to purchase a primary residence and possibly qualify for a vacation home as well. But should you take on a second home?

A few questions to consider before buying a second home:

Will it be a vacation home or an investment? This is perhaps the most important question. If you want to treat the home as a second home and not rent the property out, then you will be responsible for the ongoing maintenance and utilities when it is not in use. There will be monthly expenses that will need to be in the budget to cover the costs of home ownership including both maintenance and repairs.

For an investment property, time will need to be spent finding a management company that will take care of the property and find active renters. The advantage to this strategy is that the property will both produce income and become a tax deduction. You will be able to reduce your taxable income through depreciation, even though you will be receiving ongoing income from the property. Depending on the location and the market, the rental income may be able to cover most or all of the costs of owning the home. The downside is that you must coordinate any time spent in the home with the property management company and you must follow the IRS rules for an investment property in order to take advantage of tax deductions.

What will the long term costs be? Owning a home, especially a vacation home, will have monthly expenses beyond the mortgage payment. A few of the most common costs include utilities, cable or satellite, and internet. Many vacation homes are located in resorts with resort amenities. These are generally covered through homeowner’s dues. The cost of insurance can vary widely and will depend on the location. Properties may require flood insurance if the property is located near water. Rental properties must also be maintained and money should be set aside for frequent upgrades, as styles and renter needs change.

If you choose to rent the property there are ongoing expenses for cleaning the unit between renters and having a maintenance person who can take care of any breakdown or emergency. Renters will use the property more and costs for missing and broken items need to be included in the budget. Lastly is the cost of management, if you choose to rent the property. While they generally charge a percentage of the weeks rented, the percentage can be as high as 50%.

Adding the costs of keeping up the property with and without rental income, will help you determine if purchasing a second home is the right thing to do. If you only use the property a few days a year, that money may be better spent on other investments, and you can rent someone else’s place out when you are ready for a worry free vacation.

On the other hand, second homes, used as investment property can create a deduction due to the depreciation expense, even while you are receiving income. This has the potential to reduce your taxable income and can be a significant advantage to owning and renting real estate.

Creating a strategy with an accountant or tax advisor is the best way to evaluate all of the benefits and costs of such a venture. It is generally wise not to buy a second home, just because you can get the loan. Well thought out financial investments will provide the strongest returns.

Finishing residency and starting your practice is a very exciting time, and often a time physicians begin looking to purchase a home. After years of schooling you are finally earning a respectable income and with that comes the perks of being able to borrow against that income for a home, or two. Living in an area with a modest cost of living might afford you the ability to purchase a primary residence and possibly qualify for a vacation home as well. But should you take on a second home?

A few questions to consider before buying a second home:

Will it be a vacation home or an investment? This is perhaps the most important question. If you want to treat the home as a second home and not rent the property out, then you will be responsible for the ongoing maintenance and utilities when it is not in use. There will be monthly expenses that will need to be in the budget to cover the costs of home ownership including both maintenance and repairs.

For an investment property, time will need to be spent finding a management company that will take care of the property and find active renters. The advantage to this strategy is that the property will both produce income and become a tax deduction. You will be able to reduce your taxable income through depreciation, even though you will be receiving ongoing income from the property. Depending on the location and the market, the rental income may be able to cover most or all of the costs of owning the home. The downside is that you must coordinate any time spent in the home with the property management company and you must follow the IRS rules for an investment property in order to take advantage of tax deductions.

What will the long term costs be? Owning a home, especially a vacation home, will have monthly expenses beyond the mortgage payment. A few of the most common costs include utilities, cable or satellite, and internet. Many vacation homes are located in resorts with resort amenities. These are generally covered through homeowner’s dues. The cost of insurance can vary widely and will depend on the location. Properties may require flood insurance if the property is located near water. Rental properties must also be maintained and money should be set aside for frequent upgrades, as styles and renter needs change.

If you choose to rent the property there are ongoing expenses for cleaning the unit between renters and having a maintenance person who can take care of any breakdown or emergency. Renters will use the property more and costs for missing and broken items need to be included in the budget. Lastly is the cost of management, if you choose to rent the property. While they generally charge a percentage of the weeks rented, the percentage can be as high as 50%.

Adding the costs of keeping up the property with and without rental income, will help you determine if purchasing a second home is the right thing to do. If you only use the property a few days a year, that money may be better spent on other investments, and you can rent someone else’s place out when you are ready for a worry free vacation.

On the other hand, second homes, used as investment property can create a deduction due to the depreciation expense, even while you are receiving income. This has the potential to reduce your taxable income and can be a significant advantage to owning and renting real estate.

Creating a strategy with an accountant or tax advisor is the best way to evaluate all of the benefits and costs of such a venture. It is generally wise not to buy a second home, just because you can get the loan. Well thought out financial investments will provide the strongest returns.

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