When we’re traveling the world, whether to far-flung destinations or spots closer to home, it’s easy to imagine living somewhere else. For some of us, splitting our time between two places is the stuff dreams are made of, whether snowbirding in warmer climates or living part-time in a totally different environment to which we’ve made our homes for years.
A lot of people are making their dreams of owning a second home their reality. According to the National Association of Home Builders, in 2020 there were a total of 7.15 million second homes in the U.S., with half of those located in only eight states, including Florida, California, Arizona, and Michigan. Before jumping in feet first to join these second homeowners, there are some considerations to take into account.
“Buying a second home is an emotional and financial milestone for many people, but there are some important factors to consider when deciding to get a second home,” says Doug Perry, strategic financing advisor with Real Estate Bees. “Most importantly, don't commit to buying a second home while you're in the euphoria of a vacation.”
In fact, many factors come into consideration when determining whether or not to buy a second home rather than rent.
How Are Your Finances?
“Buyers should consider purchasing a second home when the time is right for their specific situation,” says Brian Shahwan, vice president, mortgage banker, and broker at William Raveis Mortgage. “Whether the second home will be used as a vacation getaway, to be closer to family, or for future investment purposes, understanding the financial implications is just one of the many considerations buyers should have.”
To that end, realtor and mortgage loan officer John Gilliam says the first thing to take into account when considering buying a second home is your financial stability and whether or not there is solid financial footing to justify the purchase. Costs to consider include the down payment, which can be about 20-25%, closing costs, ongoing maintenance, insurance, property management, and unexpected repairs to name a few.
And then there is the cost of ongoing travel if the second home is far away from the primary residence.
Are You Looking for a Second Home or an Investment Property?
Brian Shahwan, vice president, mortgage banker and broker at William Raveis Mortgage, advises would-be second home buyers to also consider tax implications, real estate trends, and what their true intentions are for the home.
“Whether the property will be strictly used as a second home, or it will be used partially as an investment property, it is important to look at the full picture to ensure you are making the best decision possible,” he says.
Perry agrees. “A second home is something that is available for your use 100% of the time; a rental property is an investment to generate cash flow that you do not occupy,” he says. “They are different types of property purchases with different considerations on everything from location to price. If you try to combine the two property types, you'll most likely end up with something that doesn't meet the needs of either.”
Does Real Estate Figure Into Your Financial Plan?
Shahwan also says that lifestyle preferences and investment goals should be a top consideration; Gilliam agrees.
“Does the purchase align itself with your long-term goals?,” Gilliam asks his clients. “If the buyer plans on using the property frequently, wants to retire there, pass it on to family members, or it’s the beginning of an investment strategy, then buying makes sense.
“Before someone buys that second home, they should evaluate the tax considerations or implications,” he continues. “Owning a second home can offer tax deductions on mortgage interest and property taxes, which can be beneficial if these align with their financial planning.”
Gilliam also advises his clients to consider their exit strategies if they’re not planning on passing their second homes on to family. “They should consider when they might want to sell the second home based on lifestyle changes or financial needs,” he says.
So, with all this in mind, when does it make sense to rent instead of buy?
How Often Will You Go There?
“Take the time to realistically evaluate how often you will use the second home,” advises Perry. “This is important because, in many instances, it makes more financial sense to rent when you visit.”
Shahwan says that if the property is to be used solely as a second home or vacation home for a short period of time each year, with no intention of renting it out for additional income, it may make sense to rent instead of buy.
“Renting can be less financially burdensome in the short-term by avoiding long-term maintenance costs, property taxes, and homeowners association fees,” says Gilliam. “The potential buyer also needs to be aware of market volatility — in highly volatile markets, renting allows the buyer to avoid potential depreciation of property value.”
The Bottom Line
Buy when you’re financially stable, have money in the bank, or are looking to make an investment that will pay off in the future. Rent when you don’t plan to be there much and to avoid the expenses of home ownership.