Buying a second home for investment purposes: 4 questions to ask yourself

Published Date: October 19, 2022

3D paper house on table
Making your property work for you — and not the other way around — is a lofty goal. When executed properly, a property can put extra money in your wallet and have you on your way to an early retirement.But before you make such a big investment, you’ll want to make sure your dreams are on equal footing with reality. Unlike traditional investment products like mutual funds and stocks, buying a second home for investment purposes comes with costs like maintenance, insurance and property taxes. If you’re considering investing in a second home, conducting a simple cost/benefit analysis can help put things into perspective. Any investment comes with a measure of risk, but it might not be the best choice if your financial risks outweigh the benefits. However, if the opposite is true, you could enjoy the benefits of your investment for years to come.

How much do second homes really cost?

The sales price of your second home is just the first expense in your “business” as a second home owner. To truly understand the financial responsibilities of second home ownership, be sure to budget for:
  • Property taxes
  • Utilities
  • Repairs
  • Homeowners insurance
  • Property maintenance
  • HOA fees (if required)
  • Furnishings/household necessities
  • Property management (if needed)
Without even taking into account the cost of a mortgage or needed repairs, it’s estimated that a second home will cost about $700 per month.It’s also important to consider the non-monetary costs. It takes considerable time and energy to maintain a second home and/or be a landlord if you choose to rent it out. But remember: Both the sweat equity and cash you put into a second home could increase your return on investment.

How will you use the property?

Most people invest in second homes for one of three investment purposes: 
  1. A personal vacation asset to hold for later resale
  2. A short-term rental property for a variable income stream
  3. A long-term rental property for a sustained income stream
Each reason has pros and cons as an investment tool, and it’s important to understand the differences between a rental home and a second home before making an investment. 

1. Personal vacation asset for later resale

If you’re buying a home as an investment but have no intention of renting it out, your purchase falls under this category.
ProsCons
ALLOWS YOU TO ENJOY YOUR SECOND HOME WHENEVER YOU WANTPROVIDES NO ACTIVE INCOME STREAMS
AVOIDS HASSLES AND DAMAGE FROM RENTERSREQUIRES HIGHER INSURANCE RATES BECAUSE IT’S NOT A PRIMARY RESIDENCE
MAY NOT REQUIRE A PROPERTY MANAGERMAY REQUIRE PAID SERVICES FOR LAWN CARE AND SNOW REMOVAL WHEN VACANT
IS EASIER TO FINANCE THAN A RENTAL PROPERTY
Buying a second home to rent is a different story.

2. Short-term rental

Renting out a second home to short-term tenants has been growing in popularity. Here’s what you need to know about doing the same with your property.
ProsCons
CAN STILL BE USED AS A PERSONAL VACATION HOMEMAY BE MORE EXPENSIVE IF IT’S IN A POPULAR DESTINATION
GENERATES AN INCOME STREAM TO HELP DEFRAY MORTGAGE AND MAINTENANCE COSTSMUST BE FURNISHED AND DECORATED UPFRONT
UNDERGOES FREQUENT MAINTENANCE AND CLEANING FOR GUESTS, HELPING IT MAINTAIN VALUEMAY NEED TO BE MANAGED BY A PROPERTY MANAGER
POSITIONS YOU AS THE RESPONSIBLE PARTY FOR GUEST PROBLEMS, COMPLAINTS, ETC.
MAY NOT BE ALLOWED UNDER HOA REGULATIONS OR LOCAL LAWS
MAY NOT PROVIDE CONSISTENT INCOME IF RESERVATIONS FLUCTUATE
MAY REQUIRE A BUSINESS INSURANCE POLICY IN ADDITION TO HIGHER INSURANCE RATES
REQUIRES YOU TO MAINTAIN AN ACTIVE LISTING ON A SHORT-TERM RENTAL SITE
The other way to convert a second home to an investment property is to find long-term tenants.

3. Long-term rental

Long-term rentals are like the “set it and forget it” option of the real estate world, but you still need to be prepared for the investment.
ProsCons
PROVIDES A REASONABLY CONSISTENT INCOME STREAMMAY NOT BE AS LUCRATIVE AS A SHORT-TERM RENTAL
REQUIRES LESS WORK THAN A SHORT-TERM RENTAL PUTS MORE WEAR AND TEAR ON THE HOUSE THAN SHORT-TERM RENTALS
ALLOWS YOU TO VET HOME OCCUPANTS PRIOR TO RENTING TO THEMMAY CREATE ADDITIONAL HASSLE IF RENTERS DON’T PAY
DOES NOT REQUIRE FURNISHING, DECORATING OR HOUSEHOLD ITEMSMAY SIT VACANT FOR LONG PERIODS OF TIME WITHOUT VIABLE RENTAL APPLICANTS
The second home investment type you decide to go with will also come with specific differences in taxes.

What are the mortgage and tax differences between types of properties?

When buying second homes or considering real estate investing, it’s important to know how mortgage lenders determine whether a home is considered a second home or an investment property. Expect higher interest rates, down payments and credit score requirements on a mortgage for investment properties compared to second homes.The criteria lenders use to determine taxable rental income and tax benefits for second homes are often similar to those used by the IRS and tax professionals. Tax benefits for investment properties include deductions for rental expenses, depreciation and losses.The following general rules apply:A second home
  • Must be occupied by the owner 14 days each year or more
  • Cannot be used as a rental property more than 180 days each year
  • Must be located at least 50 miles from the owner’s primary home 
An investment property 
  • Is used by the owner(s) fewer than 14 days each year
  • May be used as a rental property for any period of time
  • May be within 50 miles of your primary residence
Use these differences in lending terms and taxes to help inform your decision about how to use the property.

Will I get a good return on my investment?

To determine how much you’ll make from renting out a second home — and when you can expect a return on your investment — you will want to research rents, occupancy rates and real estate appreciation in the area where you’re looking to buy. Factor all the above in, along with an emergency fund to pay for unexpected maintenance and mortgage payments (for months with no renters) and a budget for property management, if needed. If you’re aiming for future resale, create a timeline and budget for property improvements to increase the home’s resale value. Once you’ve calculated the costs, weighed all the pros and cons, and decided on the best way to use your property, you should have a clear picture if your second home “business” is a smart investment for you. If you’re looking to own a second home for personal use and enjoyment, Pacaso offers an attractive alternative. Pacaso's co-ownership model provides true property ownership, with owners realizing any equity gains. The home’s value moves along with the whole real estate market. Many of the cons of solely owning a second home are eliminated with Pacaso’s fully managed LLC co-ownership model. Pacaso also handles all the ongoing homeownership responsibilities, like property maintenance, taxes, bill payment and budgeting. Find out more in our Buyer FAQ.This content is published solely for informational purposes and it is not intended to be investment advice. You should consult with an appropriate professional for specific advice tailored to your situation.
A flowchart provides four questions people can use to guide their search when buying a second home for investment.

FAQs about buying a second home for investment

Read on for more insight into investment property ownership.

Which is better for taxes: A second home or investment property?

Since an investment home is considered a business, it is eligible for many tax breaks, like deducting operating expenses. A second home is also eligible for certain tax breaks, but the owner must meet specific usage criteria, like renting it out for less than 180 days per year.

What is the 2% rule in real estate?

The 2% rule is used to help landlords determine how much they should charge for rent. The rule states that the monthly rent for the property should equal 2% of the purchase price at the very least.

What is the 70% rule in house flipping?

The 70% rule in house flipping, also known as the golden rule, helps buyers decide how much they should pay. The rule says that a house flipper should not offer more than 70% of the home’s after-repair value to buy the house. This figure should take into account the estimated cost of repairs.

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Kasey Tross


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