What to know before buying a second home

Maybe you’re picturing a desert villa, lakeside cottage or urban condo. Whatever the setting, owning a second home is a significant — and exciting — financial goal.

This property can serve as a vacation retreat, an investment or both. Regardless of how you plan to use the property, it’s beneficial to understand the potential financial impact of owning multiple homes. 

Your Ameriprise financial advisor can provide guidance on how another real estate property may affect your current financial situation and long-term financial goals. Here are three things to consider before purchasing a second home:

1. The impact on your overall financial goals and situation

Before you start searching for properties, review your complete financial picture and consider how this purchase may affect your overall financial goals. Consider questions such as:

• If you’re still working, are you on track to meet your retirement goals? How will this purchase affect your short- and medium-term goals, if at all?
• Do you have a strong enough cash reserve to cover periods of financial stress?
• What is your debt-to-income ratio today? What is it projected to be with the addition of a 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% down payment to secure a better interest rate and avoid mortgage insurance?
• If you’re retired, will your projected income cover the expenses of a second home?

Overall, consider the financial benefits and risks of owning and purchasing a second home, including how this investment may impact your long-term financial goals. 

Learn more: How to save and pay for a big purchase

2. The hidden costs of homeownership

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 taxes, 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. 

Learn more: Financial steps to buying a home

3. The intricacies of owning a rental property 

If you plan to rent your second home, it can generate extra income. However, managing a property can be complex. Though they can be expensive, 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, become familiar with 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 and maintenance costs 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 complicated, so work closely with a tax professional to navigate them properly.  

Learn more: 5 real estate investing strategies for building income and wealth

Let’s make a plan to achieve your goals

Your Ameriprise financial advisor can help you assess how purchasing a second home or rental property may fit into your complete financial picture. Together, we can review the considerations and decide on the steps to help you reach this goal.