Purchasing a Second Home

Purchasing a Second Home

Have you considered buying a second home? A secondary property can be a great investment in your future. It can also help you earn additional income and provide a retreat from everyday life.

If you’ve been thinking about purchasing a second home, here are some considerations to bear in mind, plus tips for getting started.

Where To Buy A Second Home

Deciding where to purchase your next property is a major decision. Should you get a home close to your family? Or would you prefer one on a beach, in the mountains or in a city you love?

It’s important to discuss locations with your spouse and other family members who might be included in this decision. From there, spend time researching the best local neighborhoods. Partner with a local real estate agent so you find the best areas for a second home. Plus, this makes the first step of the home buying process, preapproval, much easier. Doing research ahead of time about your new location, teaming up with a real estate agent in that area and calculating your finances within the new area will show upfront initiative to your lender as you navigate the mortgage process for your second property.

Uses For A Second Home

Some buyers already have a clear vision for their second home before making their purchase, but it’s OK if you’re not sure. Consider your options – it may even change your location. It’s important to note that with Rocket Mortgage®, the property may qualify as a second home if it’s rented out for no more than 180 days in a calendar year. You must also reside in the home for either 14 days or 10% of the days the property is rented, whichever is greater.

  • Vacation home: If you have a large family, you vacation often, or simply want your own spot to call home when you’re away, a vacation property might be what you’re looking for. You should choose a location you love visiting and exploring. For many, jumbo loans or conventional loans are the best option for a vacation home mortgage. It’s important to remember this mortgage process is similar to taking out a loan on your primary home, just with slightly stricter requirements.
  • Secondary residence: Does your job require a good deal of travel or time spent in another city? You might consider using your property as a secondary
  • Investment property: Some homeowners will buy a second home as an investment property. Typically, this means either flipping and reselling the home, or turning it into a rental property. Investment properties have different requirements and mortgage rates for second homes. For example, many homeowners cannot use a jumbo loan to finance an investment property, as many lenders consider it an “investment” if rented out more than 14 days of a year. This is opposed to a conventional loan where you can rent your second home for up to 6 months. Federally backed loans such as FHA loans and VA loans are also out of the question. Make sure to discuss in detail with your mortgage professional to make sure your mortgage matches your goals. At Rocket Mortgage, you can get a jumbo loan on an investment property starting at a 20% down payment depending on the number of units you want.

You can use your second home for any combination of the above. You could vacation there for a designated period of time and rent it out via Airbnb and short-term leases for the rest of the year.

Can I Afford A Second Home?

Are your finances ship-shape to the point that you can afford to buy a second home? Even if you plan to collect rental income from the property, you’ll want to be sure it’s a purchase you can afford, particularly if it will remain vacant for several months a year.

Here are some financial factors to bear in mind.

 

Down Payment And Interest Rates

As with your primary residence, buying a second home will require a down payment and a mortgage (with interest, of course) – unless you plan to pay with cash.

In fact, a higher down payment for a second home is required. Why is that? Purchases of a second home are a higher risk for a mortgage lender because of the greater chance of default on a second home (versus a primary residence) in the event of financial hardship.

The same logic can be applied to interest rates as well. In order to hedge against potential losses in the event of a default, there is almost always a higher interest rate on a mortgage for a second home.

Debt-To-Income Ratio Requirements

You’ll have to meet debt-to-income ratio (DTI) requirements in order to qualify for a mortgage for a second home. DTI refers to the amount of debt you hold versus the amount of money you make. A quick way to calculate your DTI is to add up the monthly debts you pay and divide it by your monthly pretax salary.

Most lenders require a DTI of 43% or less to get approved for a second mortgage.

 

Monthly Budgeting

You may be approved for a second mortgage on paper, but you’ll want to crunch the numbers to see if an additional mortgage makes good financial sense. The best way to do this is to add up all of your monthly payments and subtract this number from your monthly post-tax salary. The remaining money is where your second mortgage payment will come from.

You might be counting on rental income to help balance out your second mortgage payment, but you’ll still want to make sure you can afford the payment on your own, in case your property doesn’t rent as quickly as you’d like.

In addition, you’ll want to consider property taxes, homeowners association fees and general upkeep costs before you make this decision.

Rental Maintenance

You’ll also want to be prepared for the cost of buying a rental property and the maintenance that comes with it. As both owner and possibly landlord, you’ll be responsible for handling all repairs and damages. This could mean paying a repair person for services, purchasing paint, doorknobs and other home improvement products or paying a lawn service to maintain the yard.

Save at least 10% of the yearly rent for upkeep and property management. If your property rents for $2,000, the yearly rent would be $24,000. Therefore, you should save $2,400 in case of emergency repairs. Keep in mind, repairs could cost more or less than this estimate, so it’s always a good idea to have more money saved.

How To Buy A Second Home

If you’ve already been through the process of buying a house, you know that there’s a lot to keep track of.

Ready to start looking for your second home? Here’s a complete list of the steps you need to take.

Step 1: Get Preapproved For A Mortgage

It’s important to start the financing process as soon as you’re ready to start looking for a home for a couple of reasons. First, starting the process early will eliminate any financial obstacles during closing, which will help you close on time with no surprises.

Second, getting preapproved early will give you a better idea of how much you can finance for your second home, which is helpful once you start shopping for houses.

 

Step 2: Find Your Dream Second Home

Your agent can help you find your dream second home after you’re preapproved for a mortgage. They’ll work with you to find homes that fit your criteria (number of bedrooms, square footage, location, amenities, etc.) and will show you homes that fit your budget and preferences.

Once you’ve found the home you want to buy, your agent will work with you to make an offer with the selling agent and negotiate any counteroffers. The next step begins once your offer is accepted.

Step 3: Close On Your Second Home

When the seller accepts your offer, it’s time to begin closing on the home. The closing process can take 30 – 40 days, on average, and includes several steps:

Buy homeowners insurance: You’ll need to confirm proof of your homeowners insurance at closing in order for your lender to release your funding. Shop around for local policies and be sure to review extra damage protection (flood, wind, hail, etc.) depending on your home’s location.

Buy title insurance: You’ll also work with a title company to research any outstanding liens on the property to make sure it’s clear to buy. Your title company will issue title insurance to protect your purchase.

Wait for appraisal results: Your lender will arrange for a home appraisal to ensure your home’s value is accurate. If the value is the same or higher than the listing price, you’ll move on to the next step. If it comes in lower, you’ll work with your agent to negotiate with the seller’s agent and decide if the property is still a worthwhile investment.

Schedule your home inspection: Your home inspection is separate from the appraisal and does a more thorough examination of the property. You’ll work with your agent to negotiate with the seller on pricing or repairs if issues are found. If no issues are found, you’ll move on to the next step.

Arrange a final walk-through: You fell in love with the home during your tour, but you’ll want to schedule a final walkthrough to ensure the home is move-in ready.

Close on your second home: The last part of the process is to pay closing costs, sign all of the closing paperwork and receive your keys. Your agent, closing agent or attorney will manage this process to ensure all paperwork is in order.

The Bottom Line

Buying a second home is an excellent way to expand your real estate portfolio and generate another stream of income. Before you buy your home, decide how it will be used and which location makes the most sense. Once you’ve budgeted and decided to invest in a second home, start thinking about the beginning stage of home buying, getting preapproved on a mortgage. This step is so crucial to deciding how much of your second home you can finance.

“These resources are courtesy of Callie Davis, Accelin Loans, and Rocket Mortgage®”
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A Second Home As An Investment

A Second Home As An Investment

Are you thinking about investing in real estate to rent out or use as a vacation home for other travelers? It can turn into a reliable source of income. But how do you know if you’re ready to become a landlord?

We’ve created a crash course on everything you need to know before you get a loan for your first investment property and start making money.

Investment Property Definition

An investment property is real estate purchased to generate income (i.e., earn a return on the investment) through rental income or appreciation. Investment properties are typically purchased by a single investor or a pair or group of investors together.

3 Signs You’re Ready to Buy an Investment Property

First, know that the buying process is different for an investment property compared to a primary home. Before you invest in property, make sure you meet the following qualifications.

  1. You’re Financially Stable

Investment properties require a much higher financial stability level than primary homes, especially if you plan to rent the home to tenants. Most mortgage lenders require borrowers to have at least a 15% down payment for investment properties, which is usually not required when you buy your first home. In addition to a higher down payment, investment property owners who move tenants in must also have their homes cleared by inspectors in many states.

Make sure you have enough money in your budget to cover the initial home purchase costs (like your down payment, inspection and closing costs) as well as ongoing maintenance and repairs. As a landlord or rental property owner, you must complete essential repairs in a timely manner, which can mean expensive emergency plumbing and HVAC repairs. Some states allow tenants to withhold their rent payments if you don’t fix broken home utilities on time.

Make sure you budget more money than you think you need for regular and emergency home repairs.

 

Investment property expenses don’t just begin when tenants move in or when you assume responsibility for the property’s current residents. You also need to budget money for advertising and credit checks to make sure you take in the best tenants possible. A great set of tenants are an asset for your property, while bad tenants can increase your expenses dramatically.

  1. The Return on Investment (ROI) Is There

Real estate investors often see positive cash flow with their investment properties in today’s market, but the savviest investors calculate their approximate return on investment (ROI) rates before they purchase a property. To calculate your ROI on potential property investments, follow these steps.

  • Estimate your annual rental Search for similar properties that are currently up for rent. Find an average monthly rent for the type of property that you’re interested in and multiply that rent price by 12 for a year’s worth of income.
  • Calculate your net operating income. After you estimate your annual potential rental income, calculate your net operating income. Your net operating income is equal to your annual rental estimate minus your annual operating expenses. Your operating expenses are the total amount of money that it takes to maintain your property every year. Some expenses include insurance, property taxes, maintenance and homeowners association Do not include your mortgage or interest in your net operating expense calculation. Subtract your operating expenses from your annual rent estimation to find your net operating income.
  • Find your ROI. Next, divide your net operating income by the total value of your mortgage to find your total return on investment (ROI).

For example, let’s say you buy a property worth $200,000 that you can rent out for $1,000 a month. Your total potential income is $1,000 x 12 months for a total of $12,000. Let’s also assume that the property costs about $500 a month in maintenance fees and taxes.

  1. $500 x 12 = estimated operating expenses of $6,000.
  2. Subtract your operating expenses from your total rent potential: $12,000 – $6,000 =

$6,000 of net operating income.

  1. Divide your net operating income by the total value of your mortgage: $6,000-;-

$200,000 = 0.03, which makes this property’s ROI 3%.

 

If you buy a property in a solid area and you know that you can rent to reliable tenants, a 3% ROI is great. However, if the property is in an area known for short-term tenants, a 3% ROI may not be worth your time and effort.

  1. You Have Time to Manage It

Investment property management still takes a lot of time. You have to put up advertisements for your space, interview potential tenants, run background checks on tenants, make sure that

 

tenants pay their rent on time, perform maintenance on your property and make timely repairs if something in the home breaks down. You also must do all of this while working around your tenant’s “right to privacy,” a legal standard that prevents you from dropping by unannounced without at least 24 hours of warning in most states.

Before you decide to buy an investment property, make sure you have plenty of time to maintain and monitor your space.

Things To Consider Before Buying An Investment Property

Time, down payments, and returns are just a few pieces of the investment property puzzle. Here are some other considerations to think about before you invest.

What Are The Housing Market Trends?

You want to choose a property that rises in value over time. But how can you tell which areas will become the next best places to invest in real estate? The only way is to watch an area’s housing market indicators and rental trends over time and compare the direction of previous property prices and taxes to where they are now. A home purchase is a major investment, so don’t be afraid to take plenty of time to do your research and analyze market trends to find the perfect area before you dive into a loan.

Should You Buy With A Partner?

A partner might seem like a great idea -you can pool your money, split maintenance costs and requirements and combine your home repair skills to save money on professional contracting costs. However, buying with a partner also splits your potential profits in half and puts you in the position of sharing legal liability with another person.

For example, if your tenants tell your partner about a pest problem and your partner doesn’t fix the issue in a timely manner, your tenants may sue both of you because you are both landlords and you are both equally responsible for providing a habitable environment.

You should also remember that if something goes wrong with your partner and you split the cost of the home equally, you’re both equally legal owners of a single property. Make sure that the person you choose is trustworthy, responsible, and proactive when it comes to maintenance if you decide to go in on a rental property with someone else.

How Much Will Property Taxes Be?

Property taxes are taxes that homeowners pay to support their community and local government. Property taxes fund fire departments, public schools, libraries, and other local projects. The amount you pay in property taxes is directly related to the value of your home. If your home is worth more money, you pay more, and vice versa.

Local governments set their own property tax rates, so the specific amount you pay in property taxes depends on your house’s location. Speak with a local real estate agent or mortgage lender to calculate how much a certain house will require in property taxes. No estimate is going to be perfect because every homeowner qualifies for different levels of exemption as well.

 

Should You Hire A Property Management Company?

You need to decide whether you want to handle property repairs, tenant management, and maintenance yourself or if you’ll hire a property management company to manage the daily maintenance on your behalf.

Property management companies take both scheduled and emergency repair calls and check up on your property with both drive-bys and scheduled visits to make sure that tenants respect your space. They can also collect rent on your behalf. Some property management companies also offer tenant placement services and eviction processing for an additional fee. In exchange, the property management company takes a percentage of your monthly rent. If you live far away from your property or you don’t have the home repair skills to fix your own property, hiring a property management company may be a great choice.

Applying For Investment Property Loans: How to Prepare

Mortgages and loans for investment properties such as a non-owner-occupied mortgage­ work a little differently than those for personal homes.

Investment Property Loan Requirements

If you have a mortgage for your primary residence, you probably know that most mortgage lenders no longer require a 20% down payment to get a loan. Lenders are stingier with loans for investment properties, however, because the risks of foreclosure and default are higher.

Most fixed-rate mortgages require at least a 15% down payment with a 680 qualifying credit score for a one-unit investment property. Your credit score should be at or above 620 if you’re applying through Rocket Mortgage®. Lenders want you to put down 25% with a 620 or higher interest rate on two- to four-unit investment properties.

Preapproval

It’s a good idea to get preapproved for a mortgage before you start searching for homes so you know how much home you can afford.

A preapproval is different from a prequalification. A prequalification only tells you how much money you might be eligible for – it’s not as strong. A preapproval requires your financial information so the mortgage company can provide a solution that’s customized for you. While prequalification only looks at your credit and your inputted estimate for income and assets, preapproval involves a hard credit pull and proof of income and assets.

Other Considerations

When you apply for a mortgage, you also must provide some basic personal information. In most instances, your mortgage lender will require you to provide two years of tax returns, two years of W-2s, and two months of bank statements to prove that you have enough money to cover your monthly payments.

 

The Bottom Line: Get on The Path To Owning An Investment Property

Are you ready to take advantage of the benefits of real estate investing? If so, it’s time to research properties in your area. There are other ways to consider whether you’re ready: Assess your financial stability and return on investment for a particular property and decide whether you have time to manage a property. You’ll also need to consider the housing market, property taxes, and whether you’d want to hire a property management company.

 

“These resources are courtesy of Callie Davis, Accelin Loans, and Rocket Mortgage®”
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Vacation Rentals in Hood Canal

Vacation Rentals in Hood Canal

By Emily Reed, Community Sales Manager

Vacation rental opportunities have quickly become popular for second home buyers and investors alike. Whether you are searching for a getaway property for yourself and your family and are looking to offset the cost by renting it out part-time or plan to run a full-time vacation rental, new construction homes in Hood Canal could be a great choice!

As an Airbnb co-host, I have seen what a popular destination Hood Canal is for vacationers. I have also learned a lot about what guests are seeking. Here are some tips on what makes a fantastic Hood Canal vacation rental!

  1. Location, location, location! Near to the city, but far enough to feel you are getting away.

Less than two hours from Seattle, the Alderbrook community feels like a world away from the city’s noise, traffic, and chaos, without requiring a long trip. Since Alderbrook is not an island, you can either drive or take the ferry, depending on what suits you! With current gas prices, a long-haul road trip to get away for a weekend may no longer feel worthwhile.

 

  1. A quality home.

Guests are looking for a clean, stylish, quality home. Comfortable and minimal furnishings help guests to unwind. Cozy bedding, kitchen essentials, and toiletries make it easy to feel at home immediately.

Special touches like a welcome card or sampling from a local shop will make your rental stand out!

Home maintenance is essential to keep your home in tip-top shape for guests and help avoid last-minute maintenance and repair calls during their stay. New construction homes tend to have fewer issues, such as an old leaking roof, failure of worn-out mechanical units, or dealing with the dinge and damage that comes with an aging, outdated home.

  1. Activities and amenities.

When booking their stay, guests seek more than just a beautiful home. They want to be in a beautiful area with nearby amenities and activities. The Alderbrook community and the greater Mason County area offer plenty!

World-class Alderbrook Resort & Spa offers spa services and other activities for non-guests. The Resort also has a beautiful dining room, an outdoor bar area during the summer, and a year-round fire pit where you can enjoy views of Hood Canal and the surrounding mountains.

Set against the Olympic National Park backdrop, hikers and nature enthusiasts can find miles of trails, overnight and day-use campsites, and popular attractions like the High Steel Bridge. More locally, the Alderbrook Resort & Spa trail system offers fun and easy hikes ranging from a 1/2 mile to 4 miles.

For water lovers, Hood Canal Marina and Alderbrook Resort & Spa offer boat launches and water rentals to get you out on the canal. Prefer fresh water? Nearby Lake Kokanee and Skokomish park offer lake access for floaters, boaters, and anglers alike!

And don’t forget, the Alderbrook community is home to the award-winning Alderbrook Golf Course for guests to enjoy

during their stay, and it also has a Clubhouse to celebrate the 19th hole!

A good guest book is essential to highlight local activities, dining, and attractions so guests can easily find their way around.

  1. Space!

Vacationers often look for room to spread out during their stay. In recent years, more work-from-home opportunities have created a new pool of vacationers looking for longer “work remote” getaways. Separate working and sleeping spaces can set you apart. Three bedroom, two bathroom plus options allow more flexibility for potential guests.

Floor plans like the Twanoh or Hoodsport from Alderbrook Properties offer plenty of sleeping space and multiple private bathrooms, plus bonus office/den space to help separate work and family time.

  1. Top it with a cherry! The view.

While many guests are perfectly content with a quiet cul-de-sac, something that can make your rental a standout is a beautiful backyard view. A peaceful forest backdrop or stunning manicured greens are a picturesque setting for a Hood Canal getaway! And don’t forget that a private, covered patio makes for the perfect place to enjoy a morning cup of coffee

or an evening glass of wine. All floor plans from Alderbrook Properties include at least one covered outdoor patio, with the Hoodsport floor plan offering two covered patios! All floor plans also have the option of a built-in outdoor stone fireplace. Talk about idyllic!

Visit the Alderbrook Properties Listings page for more information on current listings.

Note:

Alderbrook Community does allow both short and long-term rentals. You can find details & CC&R’s here:

https://alderbrookgolfclub.com/real-estate-transactions/. If you are interested in learning more about this, please contact the Alderbrook Golf & Yacht Club for more information.

 

Are you thinking about buying a second home? Here are some great resources to help in the decision-making process.

Purchasing a Second Home

Guidance on where, why, and how to buy a second home

A Second Home As An Investment

Important points to consider about ROI, financing, property management, and more

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