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8 considerations for buying a second home

There is more to ponder than a second mortgage.

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Last updated: July 12, 2022 |

Article published: December 1, 2021

If too much time at home during the last year made you desire a change of scenery, you might be thinking about buying a second home. If so, you’re not alone. Here are eight points to ponder:

  1. Keep the big picture in sight.

Will buying a second home negatively impact your long-term goals, including saving for your retirement and paying for your children’s college? Will it affect the cash reserves that you must always maintain? If the answers to big-picture questions like these are no, you’re likely in a good position to consider a second home. But even then, you’re wise to consult an Edelman Financial Engines planner before moving ahead.

 

  1. Avoid acting on impulse.

Think about why you want a second home. Is it to build a family legacy someplace where your kids and grandkids can gather year after year? Do you want a place to keep your parents close by or to give your college student a campus-adjacent pad? Do you want to split locations by season – a summer residence up north and a winter one in the south? Will it someday be your retirement home? If you buy on a whim, you could end up with a second home that doesn’t adequately meet your needs.

 

  1. Location, location, location.

Buying a second home in a town by the ocean or in the mountains might seem like a great idea, but if you live very far from that town, getting there might be so much of a hassle that you won’t go there often. If you plan to share the space with family members, it might be wise to buy a home that’s convenient for short weekend trips. If it will one day be your retirement home, it should have good access to needed resources and services.

 

  1. Financing your second home.

You can pay all cash or get a mortgage that allows you to hold on to your cash and take advantage of today’s low interest rates – or use a combination of these. Always shop around for a mortgage. Rates for second homes are typically a bit higher than rates for a primary residence.

  1. Hire a trusted real estate agent.

Buying a second home outside your area or out of state can be tricky, as residential real estate is extremely localized. Hire a local agent, who will be in the best position to advise you on the market there.

 

  1. Experience living there.

Even if you’ve been visiting the same vacation spot for years, you need to view it from a nontourist perspective. Rent for a while in the off-season to see how you like it, and talk to locals about the pros and cons of living there.

 

  1. Renting out your second home.

Collecting rental income creates a cash flow and can be a smart way to subsidize your vacation property, but don’t buy investment real estate with borrowed money. If you want to own a rental, pay cash. Also, learn the laws governing rentals. They vary by state, city and even by neighborhood. If it’s a condo, find out whether the condo bylaws allow for rentals.

Consider using an on-site leasing company to help you find qualified renters and to help you manage the property when you’re not there. You will need a contingency plan and additional cash reserves for the rental property if rental income dries up. You also need to plan for additional costs and repairs when renting a property, so make sure to go over the numbers with a financial planner before making this decision.

 

  1. Consider taxes.

If you use your property as a true second home – rather than renting it out – you could get a tax deduction for mortgage interest and property taxes. However, this deduction is capped at $750,000 of total mortgage debt on both homes.

Property taxes on the second home are also deductible, but the IRS limits the total deduction for all state and local taxes to $10,000 per return. Different tax rules apply to second homes that are deemed investment or rental properties. The rules are complicated, so it’s best to talk to an experienced tax professional to learn how they would apply to you.

 

Whether you’re looking for a way to diversify your assets or just enjoy your favorite vacation spot more frequently, there are always pros and cons to buying a second home. In addition to these eight tips, have a conversation with a financial advisor and tax advisor to discuss your options and whether this is the right step in your financial future.

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