Should You Buy A Second Home? The Pros and Cons

If you’re starting to look for a second home, you’re one of a few, according to a data analysis from Redfin. The demand for mortgages for second homes is the lowest it’s been in eight years — due largely to high housing costs coupled with concerns about the economy.

But there are many reasons you might want to buy a second home, and not all involve putting down roots in a favorite vacation spot. For example, you might want to help an aging family member or cut down your commute.

No matter the reason, you’ll want to be sure you can handle the long-term responsibilities before buying a second home. Here’s what to expect.

Important considerations before buying a second home

Full financial impact

As a second-home owner, all the financial responsibility falls on your shoulders — twice. For example, if you have a sewer pipe problem in your main residence and then, a short time later, your HVAC system needs repair in your second home, you’ll have two whopping back-to-back bills.

Beyond mishaps, though, you’ll have to pay double the everyday expenses:

• Second mortgage payment (including homeowners insurance and property taxes)
• Utilities
• Maintenance and repairs
• HOA fees (potentially)
• Travel costs to get to the home
• Rental management fees

Although you currently might be able to afford these costs, keep your big-picture goals in sight, says Daniel R. Hill, president and CEO of investment advisory firm D.R. Hill Wealth Strategies in Richmond, Virginia. Hill encourages his clients to consider these money issues before jumping into another home:

• Are you saving at least 15 percent of your current income for retirement?
• Do you have six months’ of expenses (preferably nine months’) in an emergency cash fund readily available?
• Are you out of credit card debt?
• If applicable, have you established a college fund for your children?

If you can check all of these boxes, you might be in a safer position to consider buying a vacation home, Hill says.

Financing options

In some ways, securing a mortgage on a second home isn’t too different from applying for your primary mortgage. You’ll submit an application and have your credit report, income, employment history, assets and debts reviewed. However, you’ll likely be required to make a larger down payment than when you bought your primary residence, and you may have to meet more stringent financial qualifications. Mortgage rates are also slightly higher for second homes than for primary residences.

Financing options include:

Remember that you can’t use government-backed loans, like FHA and VA loans, to fund a second home. Lenders also treat investment properties differently from second homes. If your property will primarily be a rental, you’ll want to make that clear up front.

Ability to travel to other destinations

After 10 summers in Clearwater Beach, Florida, the appeal of warm Gulf waters might give way to the annoyance (and cost) of hurricane season. Likewise, a 10-hour scenic drive to a mountain cabin can quickly transform into a burdensome schlep after a while.

The point is: Do you want to get stuck vacationing in one place for the long term? If your family absolutely loves the location, it can make sense. However, think about whether you would prefer to plan multiple trips to a variety of destinations or stick with the same spot every summer (or every other weekend).

Renting out your second home

Collecting rent money can be a smart way to subsidize your vacation property. However, there are laws that you should know before you buy. Zoning regulations vary by state, city and even neighborhood, so what works in one community might not be allowed in another.

For example, in New York City, Airbnb is illegal unless the permanent resident is living in the apartment or the apartment is being rented out for more than 30 days.

For condominiums, buyers should find out if the condo bylaws allow for renters or Airbnb-like rentals. The same goes for homes in HOA neighborhoods. In some cases around the country, homeowners associations are working to limit short-term renters.

Cleaning services, insurance and general maintenance are costs landlords should include in their budget, as well. Since you can’t guarantee rental income, make sure you can afford these costs (including a monthly mortgage payment) on your own.

You might also have to forgo your desired time in the residence to attract customers, which could diminish the appeal and the point of a second home. For example, if you want to be there during spring break, but you can command a rental fee that can cover a large portion of your property taxes, what will you do?

“Sadly, the most demand from renters is likely during the time you want to be there,” says Timothy Parker, managing partner at Regency Wealth Management in Ramsey, New Jersey. “When we look at numbers with clients, we often end up suggesting they rent a home for a week or a month instead of entering the world of landlording. It’s often cheaper and comes with fewer hassles.”

Vacation home taxes

A vacation home is classified as either a personal residence or a rental property by the IRS. It’s a personal residence if you limit renting it out to 14 days or fewer per year; more than 14 days, and it’s considered rental property. In most cases, you’ll have to report rental income regardless of the classification.

The big difference: If your vacation home is classified as a rental property, you won’t be able to claim the mortgage interest tax deduction. However, you can deduct maintenance expenses, and even claim losses on your rental if the amount you spend exceeds your rental income. You can report these losses on Schedule E of your Form 1040.

Naturally, you should talk to a tax pro about your potential liabilities and deductions.

Long-term investment potential

Anyone who remembers the housing crisis of 2007 knows that home values are not guaranteed. After the housing market peaked in 2006, home values plummeted by 33 percent nationally during the Great Recession, wiping out equity and forcing homeowners into foreclosure.

Many financial experts agree that residential real estate is not the individual’s ideal investment: It’s too illiquid and its growth too unpredictable. So a second home should not be the main basket for retirement or other long-term-goal nest eggs. If you do want to buy a second home to rent, do your research on the local housing market to get a sense of whether a place has a proven track record as an appealing destination for vacationers and other secondary-home buyers.

Reasons for owning a second home

Despite all the work you’ll need to do and the money you’ll need to spend, there are many great reasons to buy a second home, including:

• Diversify your investments: Owning a second home allows for getting beyond the usual stocks, bonds and 401(k) plan. A second home can also act as a buy-and-hold investment — real estate does tend to appreciate in value over time — and be a valuable asset to pass on to heirs.
• Potential to move there full time: A second home can eventually become your primary residence, so you can avoid any of the work involved in finding a new location when you’re ready to retire. This is especially helpful if your second home is in a location with lower taxes than your primary residence.
• Generate passive income: As long as your property is located in an area with relaxed laws regarding short-term rentals, you can make money by listing it on Airbnb, VRBO or any other home rental platform.
• Have a place to vacation: If you have a favorite vacation spot where you truly want to return over and over again, buying a home there may make sense.

Should you buy a second home?

For most Americans, owning their primary residence is a wise move. But a much smaller subset should consider buying a second home. A second home might make sense if:

• You’re devoted to the same vacation spot. If you find yourself going back to the same beach, lake or ski resort year after year, it might be worth buying there.
• You want to become a real estate investor. Being a landlord requires work, of course, but it can be a lucrative side gig.
• Your commute just got longer. Perhaps your employer expects you to work from a location that’s too far to drive. A place closer to work could be useful.
• You want to help a family member. Maybe you want to give your adult child a leg up in the housing market or are responsible for an older relative who you’d like to have closer.

It can also be a valuable financial asset, one that has the potential to increase your wealth over time if the home appreciates significantly. But all of this assumes that you can afford the expense. You’ll want to feel very comfortable with your current financial priorities before taking on a second home.

FAQ

• What are the best mortgage rates for a second home?
  

  Rates on mortgages for second homes tend to be higher than those for loans against primary residences, because lenders consider them riskier. If you’re facing a financial hardship, you’re much more likely to pay the mortgage on the home you live in than the one you vacation in or rent out.

• How do you make an offer on a second home?
  

  The process is very similar to buying a primary residence. You or your real estate agent submit your proposal to the seller or listing agent in the same way.

• Do you need to put 20% down for a second home?
  

  Not necessarily. Some lenders allow you to put down 15 percent or even less for a second home. However, compared to down payments for primary residences, you’re less likely to find loan programs offering low down payments for second homes.

• Is it difficult to get a loan for a second home?
  

  It really depends on your situation. If you can comfortably afford the loan on your primary residence, you shouldn’t have much trouble qualifying for a loan on a second home. And for investors, there are specialty loans that underwrite your loan application based on the income generated by the property.

Additional reporting by Maya Dollarhide