Is owning a second home a smart investment?

Eric Stewart April 27, 2018

Owning a second property, either as an investment or as a vacation home, can be extremely rewarding and fun.  It can also be completely the opposite.  Why the disparity?  Because careful financial evaluation and market timing must be considered.  Often, they are not.


First, it’s important to know that you either buy a home as a second home and not for rental or you buy it as an investment to rent out all the time.  A second home can be called a second home when you are the primary user of the home and you do not rent the property for more than 14 days out of the year (tax purposes).  An investment property has to be filed as one on your taxes. It’s also important to note that the IRS offers you a chance to label the property as 20% second home and 80% rental property if you spend 20 days in a property that you rent for 80.*  Essentially, this means that, if you did not use it as a rental property for the entire year, you may qualify to categorize the property as a second home instead of a rental property. 

So why would you consider owning a second home?

There are several reasons why people choose to own a second home.  A second home is a home away from home. If you know there is a specific area you want to retire in, you could look into buying your second home in the area.  You have to consider if the property would be able to help you age in place, though, as not every house is suitable for a maturing adult.

Another reason you could choose to purchase a second home is for investment purposes. There’s no reason to think that your home could depreciate over time, especially if you’re buying in an up-and-coming town or resort area.  

If you’re part of a family that takes vacations to one place often, it might cross your mind to buy a property there instead of continually rent from a hotel or another person’s home.  This is also a choice you would have to make. If you buy a home in North Carolina, you’re going to be tied to that home and want to use it as often as possible – cutting down on your vacations elsewhere.  That might not be a problem for you, as you’ve likely already been there and you like the area, but if you’re the type of person that enjoys new adventures on vacations, maybe this isn’t the best option.

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What are the possible drawbacks of owning two homes?

derek-thomson-528231-unsplashThe most obvious one is the financial burden.  Purchasing a second home often requires a larger down payment, and you will now be paying taxes and insurance on two properties.  You will be responsible if anything goes wrong in two houses.  Remember when your laundry machine stopped working or your fridge broke, leaving you with food that’s gone bad?  You will be responsible for those emergencies in your second home – rental property or not.

If you are living a distance away from the second home, you will need a plan of action in case emergency situations arise.  If there’s a storm and a tree falls on the property (or, even worse, the house), would you be the person to handle that or will you hire an agency to continually check on the property if it’s vacant?   Consider that cost, as well as the cost of using a rental agency if you will be renting your property out.

Personal Experiences

I purchased a home that I thought would be a second home.  It was a dream to take our family there and to make good use of it.  But, after many years, we rarely used it due to the distance and other family commitments to sports and education.  We rented it out, but this rent didn’t cover the mortgage and the property was a slow drain on resources for a long time.  It would have been much better to have rented someone else’s home and had the flexibility to try different locations, then to have been locked to that home.  

I personally believe that joining a country club is one of the best investments a person can make.  It isn’t an investment that yields financial rewards for ownership, but it is one of the best ways to join with a large pool of others to share the cost of maintenance for the benefits of social and sports use.  

Also, if you decide to buy a second home, be sure to focus on the macro economic cycles of an area before you do so you don’t buy at a top as many, many did in the 2005-2008 time frame.  They ended up OK but only after a lot of pain and suffering.

If you have any questions about downsizing or buying a second home for aging in place purposes, consider joining us for our classes on Aging in Place and How to Sell Your Home for Top Dollar coming up this May.  This will give you an opportunity to learn from a SRES® certified Realtor® with over 30 years of experience.  You can also reach out to Relocation Nation if you ever need to reach an agent outside of your home area.

*Please note: We are not tax professionals.  While this information is deemed reliable, tax law changes.  Always check with a tax professional. 

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