6 Things You Need to Know Before Buying a Second Home

As a seasoned homeowner, you’ve been paying down – or already paid off – your mortgage and are now considering buying a second home. This could be a vacation home, an investment property or maybe even a combination of the two.

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Since you’ve been through the home-buying process before, you generally know what to expect. However, there are certain factors unique to buying a second home to weigh before you dive into the process. Perhaps first on your list of things to think about is your reason for buying it in the first place.

Why buy a second one?

Here are a few common reasons people buy second homes:

• Living in your favorite vacation spot. If you regularly visit a mountain town, beach village, city or wilderness area, you may want to buy a second home there. It gives you a place to call home in one of your favorite travel destinations.
• Earning cash flow and growing wealth. Renting out a property when it’s vacant can generate cash flow. Long-term ownership in a good location may increase your wealth.
• Providing housing to a family member. Your children or parents may need a place to live, and if you’re financially able, perhaps you desire to buy them a home. If so, you’ll potentially get tax benefits and appreciation of the home’s value. Charging rent is optional.
• Securing a home for your golden years. Most people plan to retire someday. A second home can become your part-time home now and then your primary residence when you retire.

What to consider before buying a second house

If some or all of the common reasons for purchasing a second home appeal to you, here are six essential things you should consider before you buy. These factors can vary depending on how you intend to use the property.

1. Is buying a second home a good investment?

When you buy the right property and maintain it well, it can potentially become a great long-term investment either as a rental or if you sell it in the future. With a vacation home – depending on how you use it – the mortgage interest and property taxes may be deductible on your annual income tax return.1

Before buying, carefully research and choose the right location for your needs. For example, you may not get as much use as you’d like from a vacation home that requires extensive travel to get there. Or if you’ve purchased a rental home in an unpopular area, it may lead to months of the property being unoccupied. This would leave you having to pay the second mortgage out of your pocket instead of using rental income to pay it down.

For potential resale or rental value, it can help to focus on areas where more people like to live or visit. This includes popular vacation destinations or cities with abundant career options.

2. Can I afford a second property?

If you already have a house with a mortgage, it’s important to know whether your budget allows for a second home. After all, you’d now have two mortgage payments, as well as taxes, insurance, utilities and maintenance for both properties.

Some experts suggest not spending more than about a quarter of your monthly income – before taxes – on all your debt payments (including the second home loan). This is known as your debt-to-income ratio.2 It’s a helpful way to know if a second home fits within your current budget. Your mortgage lender will look at this as well, along with your credit score, as they evaluate whether to approve you for a loan.3 

A second home will require a down payment as well. Plus, you’ll have closing costs and you’ll need to think about homeowners insurance coverage, as your second home will need to be protected. Be sure to talk to your insurance agent about getting a quote once you have your sights set on a potential second property.

How much do I need to put down on a second home?

Most lenders require a down payment of at least 10% on a vacation home.4 The amount may be even higher if it’s an investment property.

Every lender uses different criteria to approve applicants. You may find lower rates or better approval odds if you talk to multiple lenders. You’re more likely to get the lowest down payment and most favorable interest rates if you have an excellent credit history.5

3. How will it affect my taxes?

Understanding the tax implications of your new property will be another challenge. If you rent your place to tenants, you’ll earn rental income throughout the year, and that income is taxable. As the homeowner, you may also be able to take deductions in the form of mortgage interest, property taxes, repairs, depreciation and operating expenses.6

One of the most important things to do as the landlord is to maintain accurate records of your income and expenses so you can report the information properly when filing taxes.

Buying a second home in another state

Every state and locality has different tax laws and regulations. When buying a home out of state, look into the state, county and other local property tax requirements. Some areas could have higher or lower property taxes than where you live. This can make a difference in whether a second home is affordable and fits into your budget.

Additionally, keep in mind that property taxes are often levied based on property value. Therefore, higher-value properties would generally come with higher property taxes.

4. What other home expenses should I expect?

Just like your primary residence, unexpected and unplanned expenses may occur with your second home. Having a budget set up for these types of incidents can help prevent or relieve financial stress.

In addition to maintenance or potential repair costs and property taxes, you could have homeowners association dues. If the house is at the beach or in a flood zone, you’ll also want to consider flood insurance. Remember, flood coverage isn’t typically included in your homeowners policy. Finally, if you plan to rent the property, you’ll also need to look into insurance options that specifically protect landlords.

5. How will I use the property?

Will this home be purchased mostly for personal use, or will it be occupied by tenants? If the property will be used solely for your own vacations, this question isn’t as critical. But if you intend to rent the home to others, determine your plan for renting the property as early in the process as possible. This will help ensure that you’ll have steady rental income that can offset the home’s monthly expenses from the start, especially if you choose reliable tenants.

6. Who will maintain the property?

To help protect your investment, make a plan for who will maintain the property. Is the investment home located near your primary home? If so, you may decide to perform the regular maintenance and upkeep of the home if you have time and the proper experience. Or you can hire a trusted professional to do the work.

If the property is far away from your primary home, ask yourself how it’ll be cared for when you’re not staying there. For a house intended only for your personal use, you may be able to find a neighbor to keep an eye on it when you’re not there. With a property you’re planning to rent out, you could hire a rental management company to take care of the general upkeep.

Is owning a second home worth It?

When determining if owning a second home is worth it, it all comes down to personal pros and cons. A second home can be a lot of work and a major expense, but it can also be highly enjoyable and profitable.

Whether you use it for vacations, retirement, rental income or all of the above, you’ll want to protect your investment with homeowners insurance.

To learn about the homeowners insurance options available to you, contact your local independent agent, get a quote or speak with a Travelers representative today.

Sources

The company is the world’s best High Strength Form Traveler(ie,be,de) supplier. We are your one-stop shop for all needs. Our staff are highly-specialized and will help you find the product you need.

1 https://www.irs.gov/faqs/itemized-deductions-standard-deduction/real-estate-taxes-mortgage-interest-points-other-property-expenses/real-estate-taxes-mortgage-interest-points-other-property-expenses-5

2 https://www.amwestfunding.com/Debt-to-income-Calculator

3 https://www.consumerfinance.gov/owning-a-home/prepare/check-your-credit/

4 https://themortgagereports.com//second-home-mortgage-qualify-for-vacation-residence

5 https://www.consumerfinance.gov/owning-a-home/prepare/check-your-credit/

You may already know that annual travel insurance can be a great choice for frequent travelers. One plan for one affordable price = 365 days of protection! If you typically take more than two trips in a year, an AllTrips plan can save you money and give you peace of mind.

However, annual travel insurance plans aren’t all the same. Before you commit, pause for a moment and think about what you really need. These 7 questions are a good place to start.

1. What’s your travel budget?

Any AllTrips plan can be a good deal for frequent travelers, when you compare the cost of buying one annual plan to the cost of multiple single-trip plans. But if you’re on a fixed budget, what are the best options?

The lowest-priced plan is AllTrips Basic. You get a full range of benefits to protect you while you’re traveling: emergency medical, emergency medical transportation, baggage loss/damage, baggage delay, travel delay, and rental car damage/theft coverage. This plan does not include trip cancellation/trip interruption benefits, however.

Another economical choice is AllTrips Prime. You get all the benefits (with the same max limits) as AllTrips Basic, along with trip cancellation and trip interruption benefits. If you have to cancel your trip or cut it short for a covered reason, AllTrips Prime can reimburse your nonrefundable trip costs—and that means the plan may very well pay for itself.

2. How much do you spend on an average trip?

Each AllTrips plans has a maximum limit for trip cancellation and interruption benefits. Make sure the plan you choose has a high enough limit to cover a typical trip:

• AllTrips Prime: $3,000 per insured person, per year
• AllTrips Executive: $5,000, $7,500, or $10,000 per insured person, per year
• AllTrips Premier: $2,000, $5,000, $10,000, or $15,000 per policy, per year

When you buy an annual travel insurance plan, your trip cancellation and interruption benefit limit is for the whole year. Let’s say you have an AllTrips Prime plan and you file a claim for $2,500 after canceling a cruise in January. That means you only have $500 left to cover any other trip cancellations for the duration of your plan.

Don’t let this stop you from buying an AllTrips plan! Just be aware that you may want to purchase extra insurance to cover cancellations/interruptions for future trips if you end up filing a big claim for one trip.

3. How far are you planning to travel?

You don’t need to know where you’re traveling before buying an annual travel insurance plan. It can protect you whether you’re driving 100 miles away or flying to Australia. However, if you intend to visit a remote part of the world, you’ll probably want to choose a plan with higher limits for emergency medical care and emergency transportation.

That’s because the cost of a medical evacuation can be huge if you get sick or injured while traveling in a remote location. If you’re planning a mountain trek, a wilderness hike, or any trip that takes you far from urban areas and modern hospitals, you need a plan with generous emergency medical benefits, like AllTrips Executive or AllTrips Premier. (Emergency medical and emergency transportation benefit limits are per insured person, per trip.)

4. Do you typically travel alone or with family?

There’s one great option for annual travel insurance for the family: AllTrips Premier. You get robust travel insurance benefits for an entire household, which is ideal for a family that’s planning multiple trips together in the next 12 months.

What if you’re planning only one big family vacation, then taking the rest of your trips solo? If that’s the case, you may want to purchase annual insurance just for yourself, then the single-trip OneTrip Prime or OneTrip Premier plan to protect the family vacay. Both cover kids 17 and under for free when they’re traveling with a parent or grandparent (not available on policies issued to Pennsylvania residents). 

5. Do you often rent a car when you travel?

The cost to insure a rental car is a big travel expense that many people overlook. In the United States, you may pay as much as (or even more than) $30 per day for a collision damage waiver, which protects you from paying for damage to the car.1 In Europe, you may pay $15-$30 per day for a CDW and still have to pay a deductible of $1,000+ if anything happens.2

AllTrips plans include up to $45,000 in rental car damage and theft coverage, with no deductible, whether you’re traveling in the U.S. or internationally. (Rental car damage and theft coverage, when purchased as part of an annual plan, is not available to KS, TX, and NY residents. For WA residents, rental car damage and theft coverage may not be available in all plans. See your plan details for additional information.)

6. Are you planning to travel for work in the year to come?

Business travel in the U.S. is on the rebound.3 This means that you may soon have to resume traveling for work (if you haven’t already). It would be wonderful if your employer-provided travel insurance to protect you… but most companies don’t. If your trip is delayed, if you get sick overseas, or if something happens to your baggage, you’re on your own.

That’s why frequent business travelers often buy the AllTrips Executive plan. This annual travel insurance plan can protect business, pleasure and blended trips for one affordable annual rate. It includes special benefits for business equipment: If your equipment gets lost, stolen, damaged or delayed by a common carrier, you can get up to $1,000 to replace or repair it and up to $1,000 to rent a replacement. This can be a lifesaver for self-employed people or those who often travel to conferences and conventions.

Compared to AllTrips Prime, AllTrips Executive has higher maximum limits on many benefits:  

• Up to $50,000 in emergency medical benefits
• Up to $250,000 in emergency medical transportation
• Up to $1,600 in travel delay
• Multiple tiers of coverage for trip cancellation/interruption up to $10,000
  
  

7. How old are you?

Trick question! Unlike single-trip insurance plans, the cost of annual travel insurance is not affected by the traveler’s age. A 75-year-old traveler will pay the same as a 25-year-old traveler. That means the best annual travel insurance plan for seniors is…. any annual plan at all.

Not sure which plan is the right choice for you? Contact us anytime. We’re here to answer your questions and help you make the right choice.

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