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| Second homes- Homes away from home. Are they worth it? |
You’re not alone on this one. Did you know that about 1 million of the 12.6 million households in Canada own second homes?
Homes are considered one of the largest and most important investments a person could do in his/her lifetime. For many, it’s a great leap in life- From paying rent to getting a little bit of financial freedom and building that sweet equity.
There are many reasons people would want to buy second homes.
Some want to rent it out and earn some income.
Some want to buy and own houses then, later on, flip them to earn some profit.
Some want getaway places to escape from their daily lives when they go on vacation.
Some treat their second homes like workplaces- “Working from home,” they say.
Whatever reason you might have for buying a second home, one thing is certain- Buying a second home will greatly affect your finances. It's one of those risky financial moves.
Should I buy a second home? What are some of the things I should consider when buying a second home? Read on to find out.
1. Your current financial situation
Money is the first thing you should consider when buying a second home. Of course, buying a second home is going to bite a huge chunk off your wallet. Are you ready for it?First, you should only consider buying a second home if you have cash at hand? Yes, “cash at hand”. Not loans or mortgages.
Except for the few minorities, most people are already busy paying off their first mortgages for their primary homes. A second one is most likely going to plunge you into a risky financial situation. Remember, mortgages are long-term financial commitments that you’re expected to pay regardless of your current life circumstances- Illness, loss of a job, business failure, and death of a loved one.
Second, do you have special upkeep and emergency cash at hand? As mentioned earlier, buying a second home can be a risky financial move to some. You need to make sure you’re covered should anything happen to you after you’ve already invested a huge portion of your money into your second home. We’d advise you to at least have 9 months in emergency cash in the bank before you take this leap.
Third, there are some things you need to check off your list before you’re ready for this investment. Have you secured your children’s college fees? Have you cleared your credit card loans? Will you still be able to save some money after buying your second home?
It’s always important to look into the future and see how your income and expenses would balance out should you decide to buy a second home. If you’re not careful, such a move will drastically affect your life for the worst.
2. Will you rent it out?
Your second home has the potential of earning you some income in the name of rent. However, this route isn't for everyone. In addition to that, there are some rental laws you'll have to comply with.Below are some things you should consider before buying a second home for rental purposes:
It might not work out. There aren’t many people who live in rented houses these days- People prefer apartments because they’re cheaper than houses. So unless you plan on buying a house in tourist towns, tenants aren’t guaranteed.
It might cost you. Tenants come in all personalities and behaviors. You might find yourself with a difficult one. Some might even do more damages to the house that might cost more than the security deposit they paid.
It’s best if the property is near you. If you’re going to buy a second home for rental purposes, then at least makes sure it’s in your town for easier management. You can always hire the services of local management if your house is in another town. However, this will further lower your profit margins.
3. Will you live in it?
Maybe you want to buy a second home, but you have no intention of renting it out. You want it to be your second place of residence or vacation spot. It sounds nice, but such a decision comes at a cost. Owning two places of residence means you’ll have double the housing expenses. You now have two houses to pay utility bills for, insurance, and of course, taxes. It might not be a problem if you have the income to support this lifestyle. However, for many, such a move will only bring about a lot of financial strain.
Now, let’s say you’re in Ajax, Ontario and have made up your mind that you indeed need a second home. Finances are good, but you’re wondering how you can get started. Check out Paradise Developments to learn more about getting a new home in Ajax.
4. Flip and resell?
Some of you neither want to rent out nor keep the house- You just want to buy, flip, and make some profit. It sounds easy on paper, however, this line of business isn't as smooth as it's portrayed to be. You need to have the necessary skills to look for clients, the patience to wait for the sale, and knowledge of the laws and taxes you'll have to comply with.Ever heard of capital tax? It’s the tax you pay for selling a house at a higher price than you bought it for. Not to mention other additional taxes and renovation expenses you’ll have to incur before you list the house up for sale.
We'd advise you to carefully think this through before you decide to venture into this trade.
5. Are there better alternatives to buying a second home?
Of course, this comes down to personal wants and preferences. However, it's always good to ask if there are better, cheaper, and less risky alternatives to buying a second home. Do you need a second home for vacation purposes, or is it more convenient to rent a condo? After all, renting doesn't tie you down to one place.Do you have to own a second home only to end up in debt and strain? Is it worth the risk to venture into house flipping with your savings?
