Should you buy a second home?
Whether you're considering a second home as a family gathering place or a long-term investment, consider these key factors before buying your second home.
After a surge in demand for second homes during the pandemic, the market for the perfect vacation home or investment property has cooled off considerably, due in part to rising mortgage rates, high housing prices and remote workers going back to the office.Footnote 1 Yet the allure of the second home remains a part of the American psyche — and for some, a major source of income, with renters making up more than a third of U.S. households.Footnote 2
4 reasons to consider a second home
- For a family getaway
- As a source of rental income
- To diversity investment assets
- To test-drive a retirement location
Buying a second home is not a one-size-fits-all proposition. While some may see a second home as a vacation getaway, others may see it as a way to diversify their assets or test-drive a retirement location. Whether you rent it out or keep it solely for personal use impacts everything from affordability to the choice of property.
For example, a getaway to a remote lake can be wonderful — but you might get tired of making the lengthy trek, says Craig Venezia, author of the bestselling book Buying a Second Home: Income, Getaway or Retirement. "Unless you're retired or can work remotely forever, consider a property that's no more than a two- or three-hour drive from where you live," he says.
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Second homes: Expenses to watch out for
Some locations come with additional costs. Here's what you should think about before you decide where to buy.
Ski or mountain chalet: Plan to heat your home all winter
Keeping a ski house or mountain cabin heated throughout the winter can be costly, but it's essential to prevent frozen pipes. It's a good idea to plan ahead for this seasonal expense by budgeting throughout the year.
Lake house: Consider more insurance
If you own a lake house, you may need liability insurance. It's important to understand the distinctions between home insurance and liability insurance to make sure you're adequately protected.
Beach property: Prepare for weather emergencies
With a beach property, you'll likely need flood insurance in addition to a homeowner's policy. The threat of hurricanes can mean expensive upgrades such as impact-resistant glass — and paying for storm prep like boarding up windows.
Desert home: Add more protection from fires
Owning a desert home comes with unique considerations. You might want to protect your house from the threat of fire with fire-rated construction materials or sprinklers.
Whether you're buying the home to rent out or for personal use, review the following questions to see if this purchase might be a smart investment for you.
How will you finance the purchase?
You can write off mortgage interest on a second home loan — same as on a primary residence — up to a combined $750,000 for both residences.Footnote 3
In a hot market, paying in cash can allow you to move swiftly to nab a home you want, so it might make sense to
borrow against your investments, if eligible. Make sure you weigh the pros and cons of different financing options, as well as how the additional outlay might affect your progress toward other important financial goals.
What about ongoing expenses?
The purchase price of the house is just the starting point. You may want to do a
renovation before you move in. Besides the basics like furniture and kitchenware, you'll also be on the hook for recurring expenses like insurance, energy, Wi-Fi and landscape care. A general rule of thumb is to put aside 1%–4% of your house's purchase price each year for maintenance costs. You'll also have to pay property taxes, and in some jurisdictions, you may have to pay taxes to support your school district. As you consider other potential expenses, consider how they could impact your other financial goals and if you'll have to make any trade-offs to afford them.
Are you prepared for worst-case scenarios?
You may also encounter some unforeseen expenses, such as having to overhaul the septic tank or covering a steep rise in homeowners association fees. To judge whether you can truly afford the home, consider whether you can easily afford those unexpected things, in addition to the cost of the property, and it doesn't put a stress on your budget or put other, more essential goals at risk.
Where can you command the highest rents?
You might assume that the best rentals are those near tourist attractions, but while those homes sometimes command a premium rate, they're often limited by seasonality, says Venezia. Beach houses and ski chalets, for example, often bring in cash for only three to five months of the year. In his experience, some of the highest occupancy rates are for long-term rentals — for instance, ones that cater to visiting faculty in a college town. Talk to a local real estate agent about the average length of rentals in the area and features that renters in the area typically want, such as parking or outdoor space.
How will you manage the property?
If you'll be using an online home-sharing service or a local real estate agent, you can expect to pay up to 30% of your rental income to the company that brings your renters in the door, says Venezia. And keep in mind that renting to others means a lot more wear and tear, especially if you'll have a stream of short-term renters coming and going. Expect to spend another 20% of your rental income each year on repairs, he says, and consider hiring a property manager or local handyman to help with maintenance — especially if your property is hours from where you live. The upkeep may be more than you want to manage yourself.
What tax breaks might you get?
The IRS considers a property that is rented for 14 days or less each year as a personal home, in which case, you can't take deductions on any rental expenses (you also don't need to report that rental income on your tax return). If you rent out the place for more than 14 days, the rules get more complicated.
- You may be able to deduct rental expenses such as mortgage interest, property taxes, operating expenses, depreciation and repairs.
- But if you use the property for yourself for more than 14 days or 10% of the days the home is rented to others, whichever is greater, your deduction may be limited.
- Keep in mind that some cities and states charge a lodging tax for rental revenue earned within their jurisdictions. Talk to a tax professional about the rules that may apply to your situation.
One final tip: After considering all of the above, consult your heart — and talk with family members. Doing your homework before purchasing a second home can help ensure that you'll continue to view it as a benefit, not a financial burden.
Footnote 1 Redfin, "Demand for Vacation Homes Sits Near 7-Year Low Due to High Housing Costs, Return-to-Office Mandates," September 14, 2023.
Footnote 2 National League of Cities, "Housing for renters," September 2023.
Footnote 3 Internal Revenue Service,
IRS Publication 936, "Home Mortgage Interest Deduction."
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