Getting ready to purchase a second home as an investment property in Florida is exciting. What’s better than the beach? Making money at the beach!
There’s the thrill of the search, the prospect of passive income, and the long-term financial reward of choosing the right area. However, the second-home buying process is distinctly different than buying your first home, and treating it as an investment property adds another layer of distinction. Before beginning this process, buyers should be prepared to make more of a down payment upfront, have better credit scores, and will need to adhere to a certain set of rules laid out by their lenders. For example, if you currently have a mortgage on your primary residence, this means you will have to have enough income to cover both mortgage payments without having a debt-to-income ratio above 41%.
Another second-home quirk has to do with Florida itself: to be considered a full-time resident in Florida you must sever “tax ties” with the jurisdiction you are leaving as wells as build “new ties” (both formal and informal) in your new Florida location (BP).
Technicalities aside, purchasing a second home as an investment property is still a great way to save for retirement and diversify your investment portfolio in general. And, if you’re thinking of purchasing a second home as an investment property in a luxury location, it’s an even better investment since high-end locations tend to have some immunity to dips in the real estate
market. But before you start your search, let’s look at a few questions you should consider before you
make any commitments:
1. Will you be managing the property yourself?
Many people look at an investment property as “passive income”, but it’s not completely passive. Even if you end up getting a management company to deal with residents, it’s still a good idea to check in regularly and make sure that everything is being upheld to your standards.
If you’re planning on getting a management company to handle the day to day duties like qualifying residents, collecting rent, and making sure maintenance projects get done, then it’s a good idea to spend a lot of time upfront making sure that you’re confident in your property management company.
2. Are you buying based on emotion or logic?
Again, any house hunt can be exciting and you should enjoy yourself in the process. However, when you intend to invest in a property rather than live there for many years, your final decision about which home you want to invest in should be more of a business decision than an emotional decision.
You might fall in love with a home, but the most important thing is the numbers: the lower you can get the price, the better your chances are that you’ll make a decent profit. And here’s where it gets a little tricky: just because the numbers make sense right now, will they make sense in the long run for you financially? Will this particular location or home appeal to the
kind of clientele you want to rent to so that you can guarantee a long-term return? These are all things that need to be addressed before you start this process so that you and your agent are clear on your goals and don’t waste any time looking at properties that don’t align with your vision.
3. Are you partnering with the right people?
Some first-time investors will partner with people they’re close to, like a friend or relative, to buy a home together. This can be a good way to skip getting an investment loan, but it can also create some trouble. Investment partners should have a crystal clear agreement written up before they enter their venture together.
4. What will the renovation cost?
As with any real estate purchase, it’s great when you can find a home with a floor plan that closely aligns with what you want. But, when you’re looking for an investment property, sometimes the best and most economical way to get the home you want is to buy below your budget and use the rest of your cash to fix the place up.
Don’t wait until the property is purchased to start adding up the cost of the changes you want to make. If there’s a property that you’re leaning towards, start researching and calling around to get estimates on possible renovations before you go any further with the buying process so that you can factor in renovation expenses with the final cost. If there are major changes that need
to be made, you can factor that into the price you’d like your agent to negotiate for you.
5. Have you considered all of your mortgage options?
You don’t have to go with the first lender you talk to. Before you start shopping around for a mortgage, take a look at your own credit score, assets, and income and get an idea of where you stand and what you’re looking for. That way, you’ll know what you’re looking for and when something is really a “good deal” or if it’s time to move onto the next option.
6. Do you have reserves set aside?
Reserves are typically 2-6 months worth of income that you’ll need to set aside in case of an
interruption of income. The number of reserves you’ll need will depend on how qualified you are
when a lender approves you. If you’re well qualified, you may only need two months worth of
reserves. If you’re self-employed or you’re right on the borderline of getting qualified, you may
need to have as much as 6 months of reserves.
7. Are you planning on living in your vacation home for any amount of time during the
In recent years, Fannie Mae, the agency that creates rules for the majority of the nation’s loans, updated their stance on rental properties and vacation homes saying that lenders can consider a property a “second home” instead of an “investment property” even if rental income is detected (The Mortgage Experts). When you’re talking to lenders, make sure you understand all
of their guidelines about whether or not you can both rent and stay in the property, you’re considering.
I can help you get clear on what it takes to open the door to your dream home and answer any questions you might have about the buying process. Feel free to make a one-on-one appointment with me or give me a call at (850) 419-7383.