What to consider when buying a second home
When you're looking into buying a second home, there are a few things you should keep in mind. First, you should decide whether you'll use your second property as a vacation home or a rental. This choice may impact your tax obligations and determine what kind of insurance you need. You should also consider your personal finances and how much you'll need for a down payment.
Deciding between a vacation home or rental property
Before reaching out to your bank, lender, and insurance provider, you'll need to identify your intended purpose for the second house. Beginning the process without a clear understanding of your property goals could have a long-term impact on your taxes and finances.
If your second property will be another home for you and your family, that means you anticipate occupying it regularly and therefore could deduct property taxes from it. On the other hand, using it as a rental or investment -- meaning you'll be generating income from it -- has very different implications for your taxes.
How to buy a vacation home
After determining whether you'll be relaxing half of the year in your new vacation home or maintaining a rental property, the next step is financing. Be prepared to put down at least 10% as lenders typically view buying a second house as a riskier investment.
Buying a vacation home
If it's a vacation home or second residence, you may need to:
Live in the house for some part of the year
Confirm it belongs to you and isn't run by a management group or used as a rental
Buying an investment/rental property
If it's an investment/rental property, you may need to:
Protecting your vacation home
Finally, know that most lenders require insurance for a vacation home — or any mortgaged home. When you purchase a homeowners insurance policy for your second home, review your homeowners insurance coverage carefully so if the worst happens, you know what to expect from your insurance provider.
For example, suppose you purchased a second home by the beach. (Why the beach? NASDAQ reported in 2023 that the top 9 out of 10 locations where a second home was purchased in 2021 were on the east coast of the U.S.) In that case, it's important to know what damage your homeowners policy may cover in the event of a hurricane or flood, as it's possible you may need a separate flood insurance policy.
Protecting your rental property
If you're buying a second property you intend to use as a rental property, you'll need to get a homeowners insurance policy for your rental property, also known as landlord insurance by some. You’ll want to cover your second home the same way that you would for the home that you occupy, with protection against fire and other covered perils. A homeowners policy on your second home may also provide personal liability coverage if you're deemed responsible for your tenant’s injuries or damaged property.