Five Questions to Consider Before Buying a Second Home

Do you want to own a second home as an investment or vacation property? Learn why it’s important to look before you leap.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/The long-term investment impact of buying a second home near retirement.
3 min read

Key Takeaways

  • People can buy a second home with the longer-term aim of making it their primary home
  • Long-term maintenance costs and tax implications are among key considerations for prospective second-home buyers

  • If you rent out a second home for more than 14 days, you must report rental income to the IRS

Many Americans dream of buying a second home or vacation home. Who wouldn’t want a nice, lakeside cottage for a quick weekend getaway or a beachfront condo for a winter escape? The reality of buying a second home is more complicated, however. For starters, a second home may require a second home mortgage. 

Someone might consider buying a second home as an investment or for other reasons, says Matthew Roberts, senior financial consultant at TD Ameritrade. For example, someone may purchase a second home with the longer-term intent to make it their primary home. 

As with purchasing any residential property, mortgage rates, tax implications and longer-term price trends are among key factors to consider before buying a second home or vacation home. Below are a few key questions to ask yourself when considering whether or not purchasing a second home is the right move for you.

How will you finance a second home and how does it fit with your longer-term financial goals?

Financial aspects of any second-home purchase should pass a “stress-test,” says Roberts. “You have to understand the underlying costs up front and the impact to your long-term plan.”

Consider a second-home purchase within the context of a long-term financial plan in which you prioritize in terms of needs, wants and wishes, Roberts says. If you want to purchase a second home, you may have to table a major improvement project for your primary home until later, for example.

Do you need a mortgage to pay for the second home, or are you paying cash? For a cash purchase, consider the opportunity cost or possible lost income if you’re taking money out of an investment portfolio. If you plan to get a mortgage, make sure you have sufficient cash flow to cover the monthly payments.  

Another consideration for when you’re ready to retire: “Many people nearing retirement don’t like the concept of debt,” Roberts says. 

Just like with any large purchase, if a vacation home is on the horizon, make sure to put it on your goal-planning radar screen. You might want to maintain a separate account, and pay into it regularly, and perhaps set up automatic deposits.   

What are you going to do with a second home after you buy it?

If you plan to rent the home, you may experience upkeep burdens on your time and incur additional expenses, including insurance, Roberts notes. If the property is part of a homeowners’ association, confirm whether renting is allowed and understand other association rules. Once you’re ready to rent the place out, get to know online marketplaces like Airbnb and VRBO that match property owners with vacationers and other short-term tenants.


Also, who’s going to take care of the home when you’re not there? You may need to hire a property manager, which typically charges 20% to 30% of rental income as a fee.

What’s my second home going to cost on an ongoing basis?

As with your primary residence, make sure you think through the recurring expenses for a second home, including utilities, maintenance, insurance and property taxes.

Second-home buyers may not get a full picture of utility and maintenance costs until they’ve had the home for a year, Roberts says. For some buyers, those costs “are unexpectedly high,” he says. “Take the time to do the homework and understand what risks there may be.”

For example, insurance can be pricey. “The fact that you do not physically occupy your second home as frequently puts it in more danger for theft, vandalism and easily undetected damage, like burst water pipes,” according to the Insurance Information Institute (III).

Plus, according to the National Association of Home Builders, many of the most popular areas to buy second homes are near the Gulf of Mexico or Atlantic Ocean, where hurricanes are a risk. Other areas may be at risk from floods or forest fires. These so-called “location-based risks” might require additional insurance and higher deductibles, according to the III.

What’s the longer-term outlook for the area where I want to buy a second home?

This question ties in with another critical matter: what if I want to or need to sell my second home at some point down the road?

In other words: location, location, location. Is the home in an area that will be desirable in 10 years, 20 years? “Spend some time there and get to know the community,” Roberts suggests. Take a vacation in the area before you buy anything and talk to locals who’ve lived in the community for a long time. Get to know the place from a non-tourist perspective.

“If the home is near a beach, you may not have that difficult a time selling,” Roberts says. “If it’s a mountain home, it may take a little more time to sell.”

What are the tax implications of owning a second home?

If you use the place as a second home, rather than renting it out, interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home, according to TurboTax.

You can deduct property taxes on your second home as well. Unlike rules for mortgage interest, you can deduct property taxes paid on any number of homes you own, according to TurboTax. (As part of the new tax rules beginning in 2018, the total of all state and local taxes deducted, including property taxes, is limited to $10,000 per tax return).

If you rent out your second home then different rules apply, depending on how long your renters are there. If you rent out the home for 14 or fewer days during the year, you can pocket the rental income tax-free, according to TurboTax. If you rent the home for longer than 14 days, you must report all rental income. You might also be able to deduct expenses directly related to the rental, but a word of warning: Deductions can get complicated “because you need to allocate costs between the time the property is used for personal purposes, and the time it is rented,” according to TurboTax.

Dreaming of that vacation home can help you get through the daily grind, but it will likely take more than dreams to make this goal a reality. To set your financial goals, or to see if you’re on track for that mountain cabin or beachside condo, schedule a complimentary goal planning session with one of our Financial Consultants today. 
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Key Takeaways

  • People can buy a second home with the longer-term aim of making it their primary home
  • Long-term maintenance costs and tax implications are among key considerations for prospective second-home buyers

  • If you rent out a second home for more than 14 days, you must report rental income to the IRS

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