Buying a second home is an exciting investment. Whether you’re looking to generate income or have a home at a destination you love to visit, the path you take will depend on your existing financial circumstances. We’ve created an in-depth guide on second home purchases to help you decide if it is right for you.
While a second home is a true investment in the financial world, when it comes to getting a mortgage and filing taxes, a second home and an investment property are not the same. For example, for a home to count as a second home, you need to visit it for a minimum number of days every year. There is no such occupancy requirement with an investment property.
The advantage of owning a second home depends on the reason why someone might want to buy one in the first place. After all, while you might look upon it as a sound long-term financial strategy, someone else might opt to buy a second home as a lifestyle option. Here are some of the most common reasons to buy a second home.
Investing in real estate is one of the most lucrative opportunities you can leverage. Historically, home values continue to rise year after year. By investing in a second home, it’s most likely that you will see a return when it comes time to sell the property.
Consider these numbers shared by Trading Economics. In March 1968, the median home sales price in the U.S. was a little below $200,000. In March 2024, this number stood at around $394,000, which was a 4.8% year-on-year increase when compared to March 2023.
So, is buying a second house a good investment? Well, it can be, provided you approach the process with caution and have a clear picture of all potential costs. Besides, long-term investment in real estate can deliver better returns than most other asset classes.
Looking to Purchase a Home on Long IslandContact Us
According to a survey carried out by GOBankingRates, 40% of Americans who partook owned vacation homes. In addition, a large percentage spent less than $200,000, whereas only a small fraction spent $500,000 or more. People who buy second homes for vacationing typically like getting away from the hustle-bustle of their everyday lives once in a while and getting close to nature, be it the mountains, a lake, or a beachfront.
There are two ways to approach renting. If you buy it in a neighborhood that allows short-term rentals, you may rent it out on platforms like Airbnb and VRBO. Alternatively, you may rent it long-term, but in this case, it would become an investment property. In both cases, the rental income can help in paying down your mortgage.
Buying a second home before you retire can be beneficial in different ways. For example, you get to spread the cost over a prolonged period and also get to use the second home before retirement. Besides, you may choose to rent your primary or second home depending on which one you use at any point in time.
If you purchase a second home for personal use and don’t plan to rent it out, you may deduct the interest you pay toward a mortgage in state and local taxes. However, these depend on the deductions you’re already using toward your first home, and you should contact your financial advisor or accountant for tax advice.
All the benefits of purchasing a second home sound wonderful, but there are other important factors to consider.
If you haven’t paid off your first home’s mortgage completely and plan to get a mortgage for a second home, you’ll need to make two mortgage payments every month. In addition, you’ll need to account for the maintenance costs of two properties. While you might be able to afford these expenses now, make sure you take the long-term picture into account. For example, do you have enough savings and do you need to save for your children’s education?
For anyone wondering, “Is it harder to get a loan for a second home?” know that this depends on meeting different eligibility criteria. In addition, while first-time homebuyers get to choose from different types of mortgages, second-time homebuyers don’t get as many options. If you wish to buy a second home as an investment, you may consider applying for a second home investment loan. Your other alternatives include:
Looking to Purchase a Home on Long IslandContact Us
Do you have to put more money down on a second home? This largely depends on how you plan to use the home you purchase. For example, if you use it as an investment, you need to pay at least 20% down payment. In addition, you may expect to pay a higher interest for an investment loan.
To qualify as a second home, you must live in it for some time during the year. While you may offer it for short-term rentals, you need to keep it for your personal use for a minimum duration each year. In addition, it should be at least a predetermined distance away from your existing home. If you’re buying a home to fix and flip or rent out long-term, it will count as an investment property.
If you plan to use the rental money you get from your second home to pay off your mortgage, pay particular attention to the location you select. If you think that buying a home near a popular tourist destination that commands premium rates might work well for you, bear in mind that most such places have peak and slow seasons. Besides, you might need to forgo your desire to spend time at the home as and when you want.
With short-term renting, you also need to account for state, city, and local zoning regulations. For example, if you buy a second home in New York City, you cannot rent it out entirely for less than 30 days. When it comes to short-term rentals, the city only allows two guests and requires the presence of the primary resident the whole time. The city’s Local Law 18 also requires short-term rental hosts to register with the city.
Short-term rentals can be a concern in neighborhoods with homeowners associations as well as condominiums because many across the country are trying to limit the presence of short-term renters.
If you’re buying an investment property, you may rent it long-term.
The Internal Revenue Service (IRS) requires that you stay in your second home for a predetermined minimum number of days each year for it to count as a place of residence. If this is the case, you may deduct the interest you pay toward your mortgage.
If you don’t rent out your second home for a given number of days per year, it counts as a second home. In this case, there’s no need to report the rental income. However, you need to do so if you rent it out for more than the prescribed number of days.
If the IRS views the home as an investment property, you may file deductions related to expenses surrounding operating and maintaining the property. If the amount you spend exceeds the rental income you earn, you may report your losses through Schedule E (Form 1040).
When you sell your second home, whether or not you qualify for capital gains exclusion depends on how much time you have spent in it and the time that has passed since its purchase.
Bear in mind that states have their own tax laws in addition to the IRS. This makes it important to seek tax advice from your financial advisor or accountant.
How much you need to spend toward ongoing costs depends on how you plan to use your second home, and here are some expenses that remain common across the board.
When you apply for a second mortgage, you may expect a lender to look at the same financials such as your down payment, credit score, and debt-to-income (DTI) ratio. What varies is that you have to meet higher standards when getting a mortgage for a second home. This is because lenders feel borrowers with multiple mortgages have more chances of defaulting if they face financial difficulties.
If you’re wondering how to buy a second home with no money, know that it might be possible if you’ve paid off your first mortgage completely and then qualify for a no-down payment mortgage like a USDA loan or a VA loan.
With your first mortgage, you might have paid no down payment at all depending on the one you got. Even with a conventional mortgage, there’s a possibility you might have paid at least 5% of the home’s buying price. However, with a second mortgage, expect to pay at least 10% as down payment, although most lenders look for 20%. The minimum you might need to pay for an investment property is between 15% and 25%.
A majority of lenders require borrowers who apply for second mortgages to have credit scores of at least 620, although some look for scores of 680 and higher. While a good credit score of 670 to 739 increases the likelihood of your application’s approval, a very good score of 740 or higher brings with it an even better possibility of getting the mortgage you seek. If you plan to get a second home investment loan, expect lenders to look for scores of 700 and higher.
First-time homebuyers may qualify for mortgages with DTI ratios of up to 43%, although lenders prefer it to be 36% or lower. For a second mortgage, it is important to keep your DTI ratio below 36%. If you wish to use the home as an investment property, it might be possible to include up to 75% of the expected income from rent toward your DTI.
Despite all the work that goes into buying a second home, it can be an exciting and fulfilling process. After all, while it can work as a great investment, it can also provide significant value to your life. Whether you plan to buy a vacation home or an investment property, consider contacting a mortgage provider that offers loans for second homes and getting preapproved. This should give you an indication of how much you may borrow and you can then look for homes accordingly.
You should also discuss your plan of buying a second home with your financial consultant or advisor to determine if it aligns with your existing finances and long-term financial goals.
Fill out the form below and a mortgage professional will get back to you shortly.
Considering homeownership but not sure where to begin? The Meadowbrook Financial Mortgage Bankers Corp. guide to home buying will make the process easy all in one packet.
So, you’re ready to buy a home! Congratulations, we’re here to help you every step of the way. One of the first steps is submitting…
Buying a home is probably the biggest investment you will make. As a result, you must know what you’re getting into at the very onset.…
If you plan to buy a home, chances are you have heard about the concept of attending open houses, where you get to view properties…