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With any mortgage transaction, we believe it is critical to determine that it is the right decision and the right time for our clients. We provide our clients with uncompromising advice for two reasons:
1) It is simply the right thing to do. For many people, their home is their greatest asset, and we take the impact we can have on our clients’ financial lives very seriously.
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2) We are built on our reputation and relationships. By focusing on how we can best serve your long-term personal and financial goals, we build lasting client relationships.
There are three general purposes for buying a home: to have a place to live, a place to get away from it all, or to invest. Each of these scenarios has its own considerations, with the main ones covered below:
Primary
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The Cost of Renting Vs. Owning
This math can get involved and we would be happy to walk through it with you. Sometimes renting is cheaper than buying, or vice versa, and this math could affect your decision to buy or not.
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Your Time Horizon
Buying a home is not only a lot more involved than renting, it has a significant amount of upfront cost. Generally, the financial argument for buying becomes stronger the longer you plan to own the home.
Affect on Your Well-Being
The most subjective of the three, quality of life is certainly a big consideration when deciding to purchase. It can be helpful to crunch the numbers discussed above and then weigh that against the well-being consideration to best inform your decision.
Secondary
Affect on Your Well-Being
The biggest motivator for buying a second home is likely the impact on your quality of life.
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Opportunity Cost
What is the next best use of your assets, if not applying them towards purchasing a second home?
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Doubling as an Investment
While there are mortgage qualification requirements that require a second home purchase to be primarily designated for personal use, short-term rental is not precluded (with restrictions, reach out to one of our loan originators for further details). Also, unlike many other luxury purchases, a second home will likely appreciate in value given a long enough period of time.
Investment
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Return on Investment (ROI) Analysis
There are many factors to consider, some of which can be overlooked. Projected rent, expected vacancy rate, repairs, property taxes, homeowner’s insurance, HOA dues, maintenance services (lawn, HVAC, termite, etc), expected home appreciation, monthly principal paid, tax deduction opportunities, capital gains tax, and more. This math can get particularly complex when you consider the opportunity cost of equity trapped in your home.
Liquidity
When managing one or just a few properties, it can be difficult to weigh the risk of having a non-paying tenant and the possibility of eviction. How long could you make the payments if you weren't collecting rent? Can you simultaneously afford the potential legal fees involved with eviction?
Management
Will the property be managed by a management company or handled personally? If the first, it needs to be accounted for in the ROI analysis. If the second, how much time do you anticipate spending and what value do you place on that time?
Cash-Flow
For many investment property scenarios, the owner pays more per month than they receive in liquid funds. While the monthly gain in home equity could make the investment worthwhile, it is important to make sure any monthly loss to cash-flow will not negatively affect you.
Opportunity Cost
If not an investment property, what would you invest in instead? How does the ROI on that compare to your ROI analysis for the rental property? How does the other option compare when it comes to flexibility, liquidity, stress, time commitment, risk, etc, and how much value do you place on those factors?
Future Mortgage Qualification
Buying a rental property could increase your Debt-to-Income (DTI). It is possible that your DTI could increase to a point where you cannot afford another home purchase in the future.