Should your second home actually be the first home you buy? Did I lose you yet?
The New York Times recently revealed that more individuals are choosing to buy a second home first. So what’s driving this new trend? What type of property should you be buying first?
Second Homes First
Cost is definitely a major driver behind the recent trend. On one hand, renters in high cost areas like NY are finding it cheaper to buy a second home first. Not only are their house prices high, so too are property taxes and other living costs. Looking further afield to where properties are cheaper to buy and maintain can be the only way to get into the market for some. Sometimes that means at least several states away. This isn’t a totally new phenomenon either. It has been quite common for those in the U.K. to buy overseas vacation homes and turnkey investment properties first, due to how dramatically cheaper they are in comparison.
However, there is currently another cost trend driving things: affordability and borrowing costs. Many realize that if they don’t buy something now, they aren’t going to be able to later.
The Pros & Cons of Second Homes First
There can be both advantages and disadvantages for putting second homes first. On the plus side, there may be some tax perks and breaks. There are can also be good home mortgage loan deals available. On the downside, it can cause some mortgage challenges. Some lenders may not want to do a ‘second home’ home loan if you don’t own a first. If you aren’t going to live in it, or plan to rent it out some of the year, it could create a mortgage fraud situation, regardless of what the loan officer tells you. Be careful about what you sign. This can also create challenges when you go to by your primary residence. This is especially true when it comes to debt-to-income ratios. You’ll have the extra debt and payment of that second home, which may limit what you can buy and borrow in terms of a full time residence.
What’s a Better Move?
Buying a home is certainly a good investment. A second home can often be a good investment too. However, if you can’t buy the home you really want yet, then purchasing a true investment property first may be the best move. It could be a single-family rental or a small multifamily property. This produces income and may grow equity, which can both be used to purchase your dream home and improve your finances.
A second home can be a great investment, and – if leased when not in use – can pay for itself. In comparison, it is normally a debt and cost, rather than an income producer.
What if you can’t find an affordable, small multifamily or local investment property? Look further afield, or into other strategies. Maybe starting off lending the capital you have, or wholesaling houses, or lease options, is a better way to get started and build up to your bigger goals?
Many are buying second or investment properties first. There are clear reasons to do so. However, it is important to weigh the pros and cons, and how taking on more debt first might hamper larger goals. Compare that with buying more modestly and moving up, or finding ways to boost your income with real estate first.