Buying a 'second' home first

Is home ownership out of your reach? Some renters dip their toes into the market by buying a “second" home or investment property before a primary residence. Below are five questions to help you decide if this strategy might be the right move for you.

1. What's your intention?

Do you want to acquire a property as a vacation spot, for its income potential or as a long-term investment? From a lender's perspective, there are more risks involved with these types of properties. If you fall into financial difficulty, you may end up diverting resources to maintain your primary residence. And by not living full-time in the second home or by renting a property out, the property may suffer from neglect or misuse at the hands of tenants.

Chris Kanavos, Director, Senior Wealth Management Banker for UBS Bank USA, notes that “the industry standard for loan-to-value1 guidelines on second homes and investment properties are generally more stringent."

2. Can you afford it?

It may be tempting to look no further than monthly mortgage payments as the cost of owning a second home or investment property, but a realistic projection should include taxes, insurance and a cash reserve for upkeep. If those cash outlays plus your rent approach half your monthly income, you might want to closely evaluate your ability to afford this within your wealth management strategy.

3. Have you scoped the market?

If you're looking for a weekend getaway, ask yourself how easy it will be to reach in heavy traffic or bad weather. You might want to look for a place closer to home so that you don't lose the motivation to use it.

Be sure to get the documented rental history of the investment home or similar properties in the neighborhood. Research the inventory of comparable rentals to see whether there is a scarcity or a surplus and determine whether your tenants will be seasonal or year-round. Can you carry the annual cost of home ownership with the income from a short rental period or if you lose a long-term tenant?

See if you can make a realistic business case for generating income from the property. Perhaps it's close to a popular vacation destination or within commuting distance to an area with growing employment. You'll want to select a property with mass appeal and that has good resalable potential.

Or maybe your second home is a long-term investment. You might intend to move in when you're ready to raise a family or when you retire.

4. Who will manage the property?

As an owner, you'll have the responsibility of maintaining your property—things such as landscaping, snow clearing, storm damage repairs, replacing items that break down through wear and tear, and home security. If you're unable or unwilling to take on these burdens, find out if there are reliable people for hire before you place a bid.

“Consider house hunting in a community with a strong homeowners association that can put you in touch with these services," Kanavos advises. “You might also want to think about buying a condo where you don't have to worry about those things."

5. Are you planning to stay put?

Your decision to buy a second home should take into account the possibility of moving. For example, if a smart career move will require relocating, you might want to hold off buying a second home until you're more stationary. But if you're pretty sure you won't budge for a while, now may be the time to follow your heart while interest rates are still historically low.

If you think you'll own the home for less than 10 years, you may want to consider an interest-only (IO) mortgage, in which your monthly payments don't include principal amortization. Interest only loans allow you to make monthly payments of only the accrued monthly interest on the loan during the introductory interest only period. You should consider that, once the introductory period ends, you'll have to make monthly payments of principal and interest for the remaining loan term, and those payments may be substantially higher than the initial interest-only payments. So if it's a long-term investment, you might want to consider a traditional 30-year fixed mortgage instead.

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