• Thu. Sep 28th, 2023

    Things to Consider Before Buying a Second Home in Retirement

    BySharna Bass

    Jul 23, 2023
    Things to Consider Before Buying a Second Home in Retirement

    Summer vacation season is in full swing, and you may find yourself on a beautiful beach, by a tranquil lake, or hiking through scenic mountains. It’s only natural to think, “What if we lived here?” In fact, real estate agents in New York City are seeing increased interest from retirees looking to purchase second homes since the COVID-19 crisis. The pandemic has brought people closer and sparked a desire for multiple climates while staying connected with family.

    However, buying a second home in retirement is a major decision that should not be taken lightly. Here are some important factors to consider:

    1. Prices for homes in desirable vacation spots are currently at an all-time high. Despite the overall real estate slump, retiree and remote worker demand is driving competition and pushing up prices. Be conservative in your budgeting and ensure you can afford ongoing costs even if your income decreases.

    2. Financing a second home is more challenging, as mortgage rates for second homes are typically higher than for primary residences. Additionally, mortgage rates are currently at their highest point in 20 years. Expect to make at least a 10% down payment on a conventional mortgage for a second home.

    3. Take the time to thoroughly explore the area before purchasing. Consider renting a hotel or Airbnb for an extended stay to get a feel for the daily vibe of the location. Think about your long-term retirement needs and whether the property will accommodate you as you age.

    4. Upkeep and maintenance costs can add up quickly. Many people underestimate the annual expenses associated with maintaining a second property. Budget not only for the mortgage and taxes but also for unforeseen repairs like window replacements, roof leaks, and water heater breakdowns.

    5. Property taxes can be a nasty surprise, especially in states without income taxes. Some localities readjust property taxes based on the new selling price, leading to higher taxes than anticipated.

    6. Consider the state income taxes of your second home’s location. Buying in a low- or no-income tax state may help lower your overall tax bill, but be aware of the 183-day rule. Some states consider you a resident for tax purposes if you spend more than 183 days there during the year.

    7. Renting out your second home is a possibility but can be challenging due to lease requirements and finding short-term renters. It may also require you to act as a part-time landlord or hire a property manager.

    8. Tax breaks for second homes depend on usage. You can deduct home mortgage interest and property taxes, but only if the home is considered a qualified residence and is used for personal purposes for at least 14 days or 10% of the days it is rented out, whichever is greater.

    Before making the decision to purchase a second home in retirement, carefully consider these factors and consult with a financial advisor to ensure it aligns with your overall financial plan.