Mikey Rox and his husband, Everett Morrow, live full-time in New York City, but last year they also purchased a second house in Asbury Park, New Jersey, where they often spend their weekends.
It’s less than a mile from the beach, with three bedrooms and a private backyard — perks that are tough to come by in the Big Apple. “We wanted someplace we could relax outside of Manhattan,” says Rox, 33.
And when they’re not there, they rent it out. “We enjoy the idea of the house paying for itself,” Rox says.
Nationwide, hundreds of thousands of people just like Rox and Morrow are jumping on the vacation-home bandwagon. In fact, sales of second properties were up almost 30 percent in 2013 from the previous year, according to the National Association of Realtors.
But although buying a second home can be tremendously exciting, the decision also comes with its own unique financial considerations. So before you put an offer on that bungalow by the lake, consider asking yourself these eight key questions to make sure your head’s in the right place.
1. How much will a second home cost?
We’re not just talking about the sale price here — there are a lot of associated expenses you need to factor into the equation too. So while that vacation house you’ve been eyeing may be small, it still requires budgeting for a mortgage, property taxes, insurance, utilities, and maintenance fees — and some of those expenses are probably higher than you think.
When you’re not living in a home on a daily basis, you often don’t have the ability to tackle small problems before they become big ones — and that can translate into higher maintenance costs in the long run, says David Blaylock, a CFP® at LearnVest Planning Services. “Plus, you’re not on site. So a lot of the things you might normally take care of yourself, you’re going to have to hire someone to do.”
A good rule of thumb to consider? Budget about 1 percent of the home’s purchase price for annual maintenance. So if you bought a $300,000 home, set aside $3,000 a year for such common pop-up costs as an emergency plumbing repair or a new furnace. And if you have an older home that could present more issues or if you plan to rent it, aim for 1.25 percent to cover extra repairs.
And don’t forget to factor insurance into the equation. In general, insuring a vacation home will cost about 20 percent more than a primary residence, says Craig Venezia, author of Buying a Second Home: Income, Getaway or Retirement.
Insurance providers view vacation homes as a higher risk because you won’t be living there full-time. “In their eyes, there’s a greater chance the house can be damaged,” Venezia says. “And if you’ll be renting out the property, you’ll need additional medical and liability coverage in the event that one of your guests gets hurt on the property.”