If you think you’re ready to buy a second home, you’ll need to consider your expenses and income, and take a hard look at what money you have left over each month after your other financial obligations are met.
Financial planner Andrew Rosen says that being ready for retirement, having no high-interest debt, and being on track for other goals are prerequisites for buying a second home.
“If you know that you’re on track for retirement through your current financial plan and savings rate, and there’s enough discretion there that you can afford a second home, then I’d just look at it like another expense to plan for,” says Rosen.
But, a second home will always cost more than just the mortgage. If you’re trying to figure out how much second home you can afford, here are three things to factor into your calculations.
Check on your insurance coverage, and factor that expense into your planning
Homeowners insurance on your second home isn’t the only insurance you should be thinking about. You should probably be thinking about life insurance and disability insurance coverage, too.
Taking on another large debt like a second mortgage could mean that you need more life insurance, especially if you’re buying with a partner who could be left with that expense. Mortgage debt is generally a factor in how much life insurance someone needs, and taking on a second property would increase that figure. Before deciding on a second home’s budget, look into how increasing your coverage would affect your monthly premium, and plan for that expense.
Financial planner Riley Poppy of Ignite Financial Planning in Seattle says that anyone considering a second home should also plan to get disability insurance — a type of insurance that can help people who depend on a paycheck to pay their bills and cover expenses if they’re unable to work. If you work for a living, you should already have this coverage, but like life insurance, increasing your financial responsibilities could mean you should increase your coverage.
“Make sure that you have strong cash flow. Or that you have enough disability insurance that you can afford to make both payments,” Poppy says. If you’re unable to work, a disability insurance policy could cover both of your homes’ payments. If you don’t already have it, price it out and factor that into your budget.
Factor in the expenses that will invariably come with owning another home, and save accordingly
Just like your first home, things come up that you’ll need to spend money to fix in your second home. “We see what goes wrong with a normal home, but this is a home that you’re not in for 300 days a year,” Rosen says.
Because things go wrong, you should plan for those expenses up front. Financial planners recommend saving between 1% and 4% of your home’s value each year in a savings account that’s used only for repairs and other unexpected maintenance, reports Kate Dore for Business Insider. For a $200,000 home, that means saving $2,000 per year on the low end of that recommendation, or about $166 per month. Plan to automate this account to make it simple to save once you’ve purchased your second home.
Also, factor in any other hidden expenses you’ll face while you’re away from the home for months at a time. Will someone need to mow the lawn or shovel the sidewalks? Is there an HOA fee to pay? These costs will add up whether you’re there or not, and they should be considered as you decide your budget.
Calculate what you can afford without expecting rental income
Renting out a second home is a popular way to leverage that second home for some extra cash. But renting out your second home isn’t something to count on. After all, there’s no guarantee that your home will always be rented out and generating money.
“Make sure that you can afford it without any other income stream,” Rosen says. While it’s certainly nice to have, rental income shouldn’t be a factor in determining your second home’s budget.
That’s not to say that you can’t rent out your second home — just that you should be able to afford it without the rental income. If you can’t meet that expense comfortably, you may need to lower your budget.
