Buying a second home first could be the answer (2024)

Today, many renters in the Washington area who aren’t looking to buy a place to live will blame high housing costs or say they don’t anticipate living in the area long-term. But building wealth through real estate is still an appealing idea, industry leaders said. And buying in a housing market with lower costs — either a vacation home or an investment property — is a viable option for someone with a good salary and good credit.

With mortgage rates and home prices rising, the share of houses purchased by investors nationally has remained stable for two years, according to CoreLogic, a real estate analytics firm based in Irvine, Calif. Investors purchased 24 percent of all single-family houses in July 2021 and 26 percent in June 2023.

“We’re seeing a trend of people buying a second home first, particularly during the pandemic when younger buyers who were priced out of their home markets began buying more vacation homes,” said Daned Kirkham, senior director of real estate for Vacasa, a company based in Portland, Ore., that manages vacation rental property. “More people are seeing real estate as an asset class they want to own, plus, if they can own a place where they can work remotely or vacation in and still earn some rental income, that can be a good way to diversify their investments.”

A lot of that money is flowing from high-cost to lower-cost markets, according to Suresh Srinivasan, chief marketing officer of Roofstock, an online marketplace for single-family rental home investors that has its headquarters in Oakland, Calif.

“We’ve found that more consumers, especially those who rent in high-cost areas such as San Francisco, New York and Los Angeles and earn a significant salary, are investing remotely in places with lower housing costs such as Indianapolis and Tampa,” Srinivasan said.

Investing in real estate is still far less common than investing in the stock market, said Doug Brien, chief executive and co-founder of Mynd, a platform to buy, sell and manage single-family rental houses that is also based in Oakland. “About 158 million people invest in the stock market, while only about 10 million own real estate as an investment,” Brien said. “Among real estate investors, 85 percent own property within 60 miles of where they live. But with tech advances, it’s a lot easier now to invest in the best markets all over the U.S. rather than stick close to home.”

While attention has focused in recent years on the growing number of single-family houses owned by large-scale investors, most single-family investment properties (75 percent in 2021) are owned by individuals who own fewer than 10 houses, according to the Joint Center for Housing Studies at Harvard University.

Financing a second home

Whether you want to buy a house as a vacation property or an investment property to rent, unless you have the cash to buy the property outright, you’ll need to consult a lender about financing options.

The interest rate on a second home’s mortgage is about 1 percent higher than the rate for a primary residence, Benner said. In addition, most lenders require a down payment of at least 20 percent for a second home.

If you don’t live at a property as your primary residence, it’s considered a “second” home, he said. Lenders view loans on second homes as a higher risk because borrowers who default on a second home can continue living in a primary residence.

How to choose a second home

As with any real estate purchase, you need to identify your goals and budget before shopping. “Ideally, you want to buy a place in a market where the rent will cover the mortgage and the value is rising,” Benner said. “You’ll also build equity as you pay down the loan, so eventually you’ll have an asset to borrow against or to sell.”

Some buyers focus on cash flow and look for a property with a solid rental history, Benner and other experts say. Others are more interested in holding the property long-term and building equity. Short-term rentals for stays of from a night to a few weeks can be lucrative, but they come with additional rules and risks.

“If you plan to use your investment property for short-term rentals, make sure you check city ordinances and the homeowner association or condo association rules, because many places won’t allow them,” Benner said.

Kirkham recommended working with a local real estate agent and a property manager who knows the rules.

“We have a dedicated team of people tracking ordinances around short-term rentals because they’re constantly evolving and we want property owners to be aware of them,” Kirkham said.

If you’re buying a vacation house for personal use, it’s a little easier to choose a community because you know your preferences, such as for a beach, lake, desert or mountain location.

“If you want to use the place often or for short visits, you’ll probably want a location within driving distance,” Kirkham said. “We saw that a lot during covid when people were avoiding flying, too.”

Companies such as Mynd and Roofstock can help you find an investment property far from home. Roofstock focuses on single-family houses with one-year rental agreements, Srinivasan said.

“We also have a software program for landlords, whether they find their property through us or not, to track their portfolio of properties to help them manage their investments and taxes,” he said.

Roofstock analyzes markets for employment growth, housing availability and other factors to generate a neighborhood rating for investors. The company charges 0.5 percent of the purchase price for its services.

“Generally, we recommend that people buy a three-bedroom single-family home with 1,200 to 1,400 square feet and a two-car garage,” Srinivasan said. “That model works because most single-family home renters are looking to move up from a two-bedroom apartment with 800 or 900 square feet.”

Mynd, which operates in 30 U.S. markets, helps investors find, finance, insure, manage and sell properties.

“We want to make this process like investing in the stock market with the help of advisers,” Brien said. “Investors tell us if they want cash flow or appreciation, and then we can help them understand the risks and rewards of various markets. Then we can recommend properties that fit their budget.” Mynd focuses on longer-term rentals of at least one year, primarily in single-family houses with three or four bedrooms and a monthly rent of $2,000 to $4,000.

Consider property management services

Benner manages his own investment properties, but others look to professionals to manage second homes, particularly those far from the primary residence.

Roofstock has a network of third-party real estate agents and property managers who work with out-of-state investors. “Investors negotiate the fee for these services and pay them directly,” Srinivasan said. “It’s important to have local agents who can provide boots-on-the-ground insight.”

Mynd’s property management services — which include vetting tenants and handling leases and maintenance — generally cost 8 to 10 percent of the rent.

Vacasa offers photography and marketing, booking, price management, cleaning and maintenance. An interior design service recommends ways to boost reviews and generate higher rents.

“The type or size of house that generates the most rental income depends on the market,” Kirkham said. “For example, in Orlando, you ideally want a larger home with four to six bedrooms because larger families and multiple generations like to vacation there.