Ultimately, a second home can be a huge decision. Make sure you are prepared for the entire process. This article is intended to give a clear picture of what is involved in buying a second home. There are tons of articles about the advantages of this purchase, but it’s important to consider drawbacks… It’s better to be safe than sorry!
Any large purchase requires careful consideration, whether you are using a professional investor or shopping For Sale By Owner [FSBO]. Don’t buy a second home without considering these Top 5 Drawbacks:
1. Finding the Money
Financing a second home can be trickier than the first. In most cases, it involves a larger down payment, which could be 20% down or even as high as 25% to 30%. Second-time buyers are usually far more financially stable than when they purchased their first home, so the common source of funds comes from the equity in their current residence. Through an equity line of credit, a homeowner can qualify for up to 80% of the equity they have accumulated. Moreover, using a line of credit gives the homeowner increased flexibility to make large payments without penalty, or pay less during hard times. As long as the interest is paid each month, additional payments have no set limit.
Cash, savings, RRSP’s, G.I.C.’s, etc. have become a secondary choice of down payments for many buyers. This is simply because their use exhausts your cash-on-hand resources. As a result, today’s home buyers are more cautious than ever to maintain a fallback plan for repairs and other unexpected expenses.
Many younger buyers partner up with friends or family, sharing mortgage expenses as well as the property itself. This is a great way to qualify for financing, but it is also a well-documented fact that such partnerships often result in major disputes, and even legal problems in the end. Joint ventures are one of the hardest business relationships to maintain. They tend to start out well, but over time, disagreements may arise. Issues like divorce, bankruptcy, and job loss are common causes of failed joint ventures. For example, unexpected expenses or repairs can also lead to disagreements about who is paying for what, and who is responsible for doing the work.
“Vendor take-back mortgages” have also been on the rise in today’s economy. But buyers beware: the rate and terms of such an agreement may not be the best deal to be had… Always check with a professional before signing any documents.
2. Joint Ventures
As mentioned above, buying with friends or family can be a risky move. Although the financial stability of two or more incomes makes the banks happy, statistics show that this type of investment has its disadvantages over time. People change and so do their lifestyles and financial abilities; job loss, divorce, and bankruptcy have been shown to shift major financial pressure on to one party. Fights over maintenance, repairs, and time-sharing may also occur. If both or all parties plan on personally using the property, there will likely be conflict at some point in time.
3. Maintenance & Repairs
All property needs maintenance. But who decides where to draw the line? First of all, there are general maintenance issues that need to be budgeted right from the start. Indeed, the only way to minimize the potential for future conflict is to consult/hire a professional to draw up a contract that fulfills the stated needs of both parties. Then there are what we will call “five-year maintenance items”; these are things like shingles, furnace, hot water tank, plumbing upgrades etc. These items do come up and will have a larger dollar value attached. Not to mention “upgrade maintenance”, such as decks, docks, out buildings, etc.
Who decides what expenses are needed and who does the work? Not everyone may agree on the standard of the job required. For example: Bob wants to put new shingles on the cabin, quoting $1,200 for the job. But his partner, Larry, simply wants to patch it- an $80 repair if Larry does the work. So, who’s the decision maker? This may sound trivial, but let’s say Bob is a perfectionist and Larry is a patch-and-go kind of guy. Over time, if you just keep patching, the property may depreciate and lose its desirable look, leaving Bob frustrated and resentful. Eventually things erupt, disputes arise, and relationships are put to the test.
4. Yearly Charges
Owning a home can definitely be conceptualized as a “never-ending list of expenses”, including property taxes, home insurance, yearly maintenance, Property Management fees, etc. It follows that owning a second home means more bills to cover, so be aware of all associated home ownership fees/charges for which you will be liable.
5. Return on Investment
Most people view a second property as an investment. Even if you don’t intend the home as a source of rental income, the idea is that over time, the property at least maintains its value, if not rising in value. But what if property values drop, interest rates increase, vacancy rates increase, or joint ventures fail? Statistically, not every investment property is resold for a higher price than was originally paid… Timing is a major factor in selling, and a forced sale may result in a loss instead of a gain.
In sum, buying a second home can be a great investment in the future, whether you hire an agent or engage the market as a For Sale By Owner [FSBO]. In the case of joint ventures, the partner(s) you choose will require careful consideration before signing on the dotted line. Real Estate can absolutely be looked at as a business venture, so get all the terms you can possibly think of in writing beforeissues arise.