Key takeaways

  • Demand for mortgages for second homes is currently the lowest it's been in several years.
  • When considering buying a second home, it's important to consider the full financial impact: the costs of upkeep, utilities, and potential rental management fees.
  • Laws and regulations surrounding short-term rentals can vary by location, so it's important to research and consider potential limitations before purchasing a second home to lease out.
  • While a second home can be a valuable asset and vacation spot for family and friends, it's important to also consider the ongoing expenses and potential responsibilities that come with owning a second property.

While the second-home market soared a few years ago during the peak of the pandemic, these days, it is a different story, according to a data analysis from Redfin. The demand for mortgages for second homes is the lowest it’s been in seven years — due largely to expensive housing costs coupled with employers requiring workers to return to the office.

However, that lower demand may work in your favor in scoring a second home: Less competition leads to more buyer bargaining power. And a greater choice of properties, possibly.

Before you join the coveted second-home club, read on to learn whether you’re up for the long-term responsibilities.

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
  • Upkeep
  • 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, VA. 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?
  • Is your current home paid off?
  • 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

As with any loan, banks will consider whether your income is sufficient to pay your costs, says Judith Corprew, executive vice president and chief compliance and risk officer at Patriot Bank in Stamford, Conn. Be prepared to have your credit report, income, employment history, assets and debts reviewed.

In fact, it’s not that different from applying for your primary mortgage, though it can be quicker, depending on the financing method you choose. Options include:

Consolidating outstanding credit card or other high-interest debt into a lower payment, using a HELOC or other low-interest products, can help your financial picture look better to lenders, says John Sweeney, founder and managing partner at Momentum Capital Partners in Boston.

Ability to travel to other destinations

After 10 summers in Clearwater Beach, Fla., 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.

Star Alt

Keep in mind: You can only deduct interest paid on mortgages of $750,000 or less total of all your homes.

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 secondary house should not be the main basket for retirement or other long-term-goal nest eggs. If you do want to dabble in property as a business, 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 real work involved in finding a new location when you’re ready to retire.
  • 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 host every family reunion and gathering: A second home can act as the meeting point for friends and family to come together and disconnect from daily life stress.

Should you buy a second home?

Owning a second home means you have a vacation spot you can return to year after year, building memories. It can also be a valuable financial asset, one that has the potential to increase your wealth over time if the home appreciates significantly.

“I’ve seen firsthand the value a second home can bring, especially in today’s market climate. Post-pandemic, with the market cooling down a bit, it’s a prime time to consider investing in a second property,” says seasoned real estate investor and licensed Colorado agent Brett Johnson, of Denver-based New Era Homebuyers.

Of course, when buying a second home, you can’t ignore the associated expenses, including ongoing maintenance and upkeep and property taxes. These types of expenses can strain your budget or limit your financial ability to travel elsewhere. “From my experience, it’s wise to ensure you can comfortably cover not only the mortgage but also ongoing maintenance and upkeep expenses,” says Johnson.

If you’re considering buying a second home to rent, you should consider the time and effort that goes into being a landlord and whether that’s truly a job you want to take on. Also, make sure your desired area isn’t in a location with local laws limiting short-term rental properties, like Airbnb-style rental homes.

But don’t rule it out. “Exploring short-term rental options could be a savvy move for anyone eyeing a vacation home purchase,” says Johnson.”They can help offset the costs of owning a vacation home by generating rental income when you’re not using the property yourself.” He recommends using a management company to manage your rental, especially if you live far away. Don’t forget it will be an expense: Some companies may charge up to 40 percent of your rental revenue. Still, if it at least covers the cost of upkeep, it can be worth it — and ensure the home stays in good shape when you want it, too.

Additional reporting by Maya Dollarhide