Second homes have long served as both a vacation spot and an investment. With a second home, you always have a vacation destination, and if the housing market works in your favor, you’ll own an appreciating asset instead of shouldering the expense of a hotel or rental stay. The home can also be a source of income, if you opt to lease it out.

If you’ve been thinking about buying a second home, you’ll want to consider the full financial impact versus your income potential. Here are some key things to think about before you buy a second home.

Key considerations for buying a second home

A second home may be a place to vacation, but owning one isn’t always a holiday. You’ll need to plan for additional expenses and pay attention to the amount of time you — or others who are paying to use it — spend there.

  • Affordability: If you aren’t paying all-cash for your second home, you’re going to have a second mortgage. Take a close look at your budget to determine if that extra monthly cost makes sense for your finances. You’ll also need to budget for another homeowners insurance policy (and premiums), utility bills, property taxes and many of the other expenses of, well, your primary home.
  • Occupancy requirements: If you’re buying a second home, you may be thinking about making some money from it when you’re not using it. However, if you rent it out too often, your second home would be considered an investment property and could be subject to different rules and regulations. If your mortgage is backed by Fannie Mae or Freddie Mac, for example, it limits your leasing: The property must be “available primarily for borrower’s personal use and enjoyment” for more than half of the calendar year. The IRS has rules, too: If you rent your second home out for more than 14 days a year, you’ll need to report the rental income. If you sell the home at a profit, you might be liable for capital gains tax.
  • Location: Buying a second home in a beach resort sounds like a great idea, but if you live really far from that town, getting there might be so much of a hassle that you don’t go there that much. Think about your lifestyle, and find a second home in a destination where you’ll really be using it on a regular basis.
  • Maintenance: Even though you won’t spend as much time in your second home, you’ll still need to pay for upkeep. The HVAC system will eventually need to be replaced, and the property may need a new roof. The exterior will also need attention (think lawn mowing and snow removal), so if you aren’t there often, you’ll need to budget for a maintenance or management company to handle it.

How to buy a second home

  1. Find a real estate agent
  2. Get preapproved for a mortgage
  3. Go home-hunting
  4. Make an offer

1. Find a real estate agent

The best way to go about buying a second home is to find a real estate agent who’s plugged into your desired location. The right agent can fill you in on price histories and how comparable sales have fared, as well as resale prospects.

“A good agent knows market trends,” says Nathan Zeder of The Jills Zeder Group with Coldwell Banker in Miami Beach and Coral Gables, Florida,  including “how long homes have been on the market; if there are homes not currently on the market that might be available; why one side of the street could be worth 5 percent more than the other; if the direction of the backyard gets better sun; and how close the schools, restaurants, city centers, airports, country clubs and marinas are.”

Putting all of that together, Zeder says, “allows the buyer to make the best decision, not only about the home but about the location they are choosing in their new community.”

When you’re interviewing potential agents, Zeder recommends asking questions about how long the agent has lived and worked in the area and how involved they are in the community.

2. Get preapproved for a mortgage

When you were buying your first home, getting preapproved for a mortgage showed you were a serious buyer. Buying a second home is no different. A preapproval shows that you’ve already done some work to move the transaction forward and that a lender is ready to help you make the purchase.

Shop around for rates, too. If you can shave off a few points from your interest rate, you can save thousands of dollars in the long run, which means you can enjoy being in your second home knowing you’re paying less.

3. Go home-hunting

Just as you compared different neighborhoods and options with your first home, be open to touring a range of different properties for your second home to see what fits you and your family’s needs best. Research local property tax rates, and try to get a sense of the housing market in the area. Is it trending upward, a sign that your second home could also increase in value?

4. Make an offer

Once you find the perfect place to call your home away from home, it’s time to buy. If you can make a sizable down payment and still leave plenty of cash reserves, go for it — a bigger commitment on the front end can pay off in the big picture and reduce your overall debt burden.

Keep in mind that getting second home insurance may be more challenging than for a primary residence. If you’re considering a second home on the beach, for instance, you’ll need flood insurance. It has become more difficult to get flood insurance in coastal communities, and the cost has increased exponentially in some markets. Discuss these expenses with your agent and make sure your budget lines up.

Should I buy a second home?

Buying a second home might be a smart move for you if you’re looking for:

  • A regular vacation spot if you enjoy returning to the same place but prefer a homey lifestyle and to build equity over spending money on hotel bills or rentals
  • A home for retirement that you can begin paying the mortgage on while still employed
  • A commuter home if you or your partner live a burdensome distance from your workplace
  • A new house you can move into while using your current home as a rental property
  • A home for a family member such as a college student, recent grad or aging parent

Second homes vs investment properties

Second homes and investment properties aren’t the same thing. If you’re borrowing money to get the home, it’s important to be honest with your lender about your plans for its use. That’s because lenders have different down payment requirements, credit and underwriting standards and interest rates for these two types of properties.

In addition to securing a loan, understanding what distinguishes a second home from an investment property is important when you file your taxes. If you use it as a true residence — rather than renting it out — you could get a deduction for mortgage interest and property taxes, just as you do with your primary residence. However, this deduction is capped at $750,000 of total mortgage debt. If you already have a $550,000 mortgage and get a $300,000 loan for a vacation home, for example, you won’t be able to deduct all the interest on the second mortgage.

Property taxes you pay on your second home are also deductible, but the IRS limits the total deduction for all state and local taxes to $10,000 per return. Different tax rules apply for second homes deemed investment properties rather than vacation homes, too.

Bottom line on buying a second home

Buying a second home means you always have a place to escape to, but being a second homeowner comes with some harsh realities: more expenses, more maintenance worries and more potential tax stresses. If you plan to obtain a second home mortgage, get the financing lined up in advance, and partner with the right real estate agent who has experience in the area you’re hoping to call your home away from home.