Whether it’s on the beach, tucked far away in the mountains or in a bustling city, perhaps owning a second home has always been one of your dreams. But before you start dreaming of frequent retreats to your hideaway in the hills, you need to consider all the pros and cons of owning a second home.
Pro: Vacation Rental Income
If your potential second home is in an area that attracts renters, you may be able to use your house to generate extra income. After all, if it's a second home, you won't be spending all of your time there. You can use this opportunity to rent your house and generate income that can be used to subside your mortgage, or even more if you are able to rent on a consistent basis. Your rental income can even help fight the costs of the depreciation on the actual house over the course of your ownership.
Pro: Tax Benefits
Just like your primary residence, owning a second home can provide you with some tax benefits you may not have been aware of, according to realtor.com. If buying a second home puts you over the $1 million debt threshold, you may be able to write off all of your interest on your loan payments [1]. If you plan to use your second home to both vacation and generate rent revenue, you also may be able to deduct a portion of any rental-related expenses come tax season [1].
Pro: Potential Appreciation
Notice that this doesn't say investment opportunity; while owning a home can save you money compared to renting over a number of years, The Wall Street Journal has cited closing costs, maintenance expenses, and low rates of return as reasons you shouldn't necessarily buy a home as an investment opportunity [2]. However, a home, unlike a car or almost any other type of good, has a reasonable possibility of appreciating over your term of ownership.
Con: The Challenge in finding renters
Before you start dreaming about the perfect property that pays for itself through rental income, take a step back. "Every day that an investment property sits empty means a loss in profitability to an investor," says real estate agent Rhonda Mogul in an Investopedia article [3]. You should be ready for the possibility of paying your mortgage without rent income (more on that below.)
Con: Struggling to Sell Your Home
If you ever decide to sell your house, you may have difficulty getting it sold. It’s important to remember that even if your house has appreciated in value, you can't realize that gain without selling your home. It may take many months to find the right buyer.
Con: Affordability
An ill-timed purchase of a second home could be a financial disaster. Before you start shopping for a second home, you need to make sure you can actually afford it. Learnvest recommends that you evaluate important aspects of your financial situation, like high interest debt, college savings for your children, and the status of your retirement funds before taking the plunge on a new home [4].
Con: Special Attention and Maintenance
Over the course of your ownership, your home will need attention to ensure it retains value, and is compliant with all renting regulations. As the owner, you will either need to pay for a landlord to take care of your house, or you will need to roll up your sleeves and do it yourself.
Sources:
[1] 5 Tax Benefits of owning a second home, Realtor
[2] Don't Buy a home as an investment, Wall Street Journal
[3] Does it make sense to buy a second Home, Investopedia
[4] 8 Questions you should ask yourself before buying a second home, Learnvest
FAQs
The downside of buying a vacation home is that you will have two of everything – mortgages, property tax bills, water bills, fuel bills, etc. It also means additional responsibility for repairs and general upkeep. At the same time, owning a second home can be very rewarding in tangible and intangible ways.
What are the pros and cons of owning a second home? ›
The downside of buying a vacation home is that you will have two of everything – mortgages, property tax bills, water bills, fuel bills, etc. It also means additional responsibility for repairs and general upkeep. At the same time, owning a second home can be very rewarding in tangible and intangible ways.
What are 3 advantages and 3 disadvantages of buying a home? ›
Added tax benefits
| Pros of owning a home | Cons of owning a home |
|---|
| Predictable, long-term expenses | Long-term commitment |
| Better privacy and autonomy | High homeownership costs |
| More living space | More difficulty relocating |
| Tax advantages | Risk of decreased home value |
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Why Buying a Second or Even Third Home Is Becoming More Popular Than Ever. Low interest rates, pandemic-era savings and a hybrid-work revolution are making it more feasible for people to split their time.
Should you pay cash for a second home? ›
If you pay in cash, that's money you get to keep in your wallet. Avoiding a monthly mortgage payment can be especially beneficial if you're using cash to buy a second home or investment property; this means no extra mortgage payment to worry about each month and a larger profit margin on rental income.
What are the disadvantages of owning a second home? ›
Cons
- Additional expense. There may be additional expenses involved in getting from one property to the other. ...
- Lack of Variety for vacations. If you like variety in your travel, owning a second home can limit your travel opportunities. ...
- Limits on VRBO: Some popular vacation areas limit vacation rentals by owner.
Important considerations before buying a second home
- Full financial impact. As a second-home owner, all the financial responsibility falls on your shoulders — twice. ...
- Financing options. ...
- Ability to travel to other destinations. ...
- Renting out your second home. ...
- Vacation home taxes. ...
- Long-term investment potential.
These three essential factors — Credit, Capacity, and Collateral — play a pivotal role in determining your eligibility and terms for a mortgage. Let's delve into each of these C's to unravel the secrets to a successful mortgage application.
What is the rule of 3 when buying a house? ›
If you really want to keep your personal finances easy to manage don't buy a house for more than three times(3X) your income. If your household income is $120,000 then you shouldn't be buying a house for more than a $360,000 list price.
What is meant by the 20% down rule? ›
Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a rule that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).
Assuming the median age of the typical “move up,” or second-time home buyer is roughly 40 years old (given the simple math of 33 + 8), a median repeat buyer age around 55 means that a lot more people in their 50s, 60s and 70s are acquiring third, fourth, or even fifth properties.
How many homes do rich people own? ›
Average number of homes owned by UHNWIs in different regions worldwide 2022. The world's richest people owned on average about four homes in 2022. Ultra High Net Worth Individuals (UHNWIs) owned the most homes in the Middle East - 5.3 residential properties.
Do millionaires own their homes? ›
In 2020, 58% of the state's equity millionaires owned their homes free and clear. Statewide, there has been a dramatic rise in the number of Californians who have paid off their mortgages, from 1.6 million households in 2000 to 2.4 million in 2020.
Does the IRS know when you buy a house cash? ›
The law demands that mortgage companies report large transactions to the Internal Revenue Service. If you buy a house worth over $10,000 in cash, your lenders will report the transaction on Form 8300 to the IRS.
Is it smart to buy a second home? ›
The most important factor to consider before buying a second home is whether it makes sense as an investment for you and your family. Lenders' terms may seem harsh, but leveraging the equity in your primary residence can be a great way to build out your real estate portfolio without tying up a lump sum of cash.
Is a second home considered a good investment? ›
Whether buying a second home is a good investment depends on various factors, including your financial goals, the intended use of the property and market conditions. If the property appreciates and generates rental income, it can be a sound investment.
Is owning a second home a good investment? ›
With careful planning, buying a second home for investment purposes can potentially help you generate passive income and prepare you for an early retirement. What is an investment property, you ask? If you plan to generate income from value appreciation or renting, your second home can become an investment property.
How do I avoid capital gains tax on a second home? ›
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
Is it better to have a second home or investment property? ›
Buying a second home can be significantly easier and less costly to finance than buying an investment property. Investment properties can offer you tax deductions by claiming operating expenses and ownership.
Is owning multiple homes a good investment? ›
Owning multiple homes gives you the opportunity to create a sustainable and passive cash flow stream. Each additional property adds to the total rental income, which can help cover mortgage payments, property taxes, maintenance costs and other expenses associated with owning multiple rental properties.
