Second homes and properties purchased for investment purposes are big business in the U.S. According to the National Association of Realtors’ 2017 Investment & Vacation Home Buyers Survey, about 12% of all home sales in 2017 were acquired for vacation use and 19% for investment purposes. With roughly 6 million properties changing hands each year, 1.8 million are for non-primary use.
The reasons for acquiring a second property are varied – from warm-weather getaways to a consistent source of cold, hard cash – and with each objective, there are specific guidelines, mortgage requirements and tax implications. Let’s take a closer look at the deciding factors of whether a second home is in your future.
When starting your search for a vacation home, location will likely be your primary focus. Whether you envision fun and sun on the beach or a peaceful mountain hideaway, keep in mind that mortgage lenders often have guidelines for the minimum distance between your primary and vacation properties (usually in the 50- to 100-mile range). According to the NAR report, water is a prime attraction with 57% of vacation homes situated near a beach or lake.
As far as the property itself, you’ll want to look for a home that’s easy to live in and maintain. If you’re passionate about entertaining, having gracious guest quarters, plenty of bathrooms, a big open kitchen and spacious living areas are essential. If peace and seclusion are your preference, you can save on interior square footage and invest instead in a larger, more private lot.
Second homes receive the same tax deduction benefits as primary residences, but your mortgage down payment requirement will be higher. For both mortgage and tax deduction purposes, vacation homes are subject to strict rules regarding if and for how long they can be rented to others.
Of course, you must factor in all the expenses maintaining a second household entails, including all furnishings and housewares (down to two sets of toothbrushes), utilities and insurance, maintenance and caretaker fees, any homeowners association dues and don’t forget the cost of travel to and from your new retreat.
Second “Primary” Homes
Whether for work or family obligations, or a just thirst for variety, many people prefer to live in two places at once. Rather than serving as a vacation getaway, their second home caters to everyday life, work and responsibilities. It’s a pied-à-terre, or a “foot on the ground” as the French – and New Yorkers – would say.
Second homes used in this way are typically more modest than a primary residence, especially if they’re used by just one member of the household rather than the whole family. A cozy bedroom is important, and a fully functional kitchen will save on dining expenses, but living spaces can be smaller or fewer.
Even if it’s a bit simpler than your primary house, the vibe should be welcoming and relaxing – somewhere you’ll be happy to arrive after long commutes between your two locations. Look for options within easy reach of your preferred transportation hub, and close to your office or local obligations. Condominiums and lock-and-leave communities are ideal for this use due to their security and maintenance provisions.
Many of the expenses, mortgage and tax ramifications for a vacation home apply in this category, but keep an eye out for any HOA or co-op board regulations that may frown upon pied-à-terre usage.
Moving to a less expensive area, or one with ideal weather, is a common plan for many Americans approaching retirement. For those who know where they want to move, this can mean several years of accruing rental income or equity on a retirement home purchased well before retirement age.
Mortgage rates are still low, so securing a loan now could have significant benefits down the line. Getting approved for a home loan while still employed is also infinitely easier than when you’re not. Do some serious number crunching to assess your ability to pay for the home after you retire, any changes in tax considerations between your current and future address, plus the upkeep and income taxes involved in the meantime.
Areas with good weather, a reasonable cost of living, ample local shops and services, and convenient public transit are preferable. As for the type of property, whether you’ll be renting it out or using it as a vacation home will have an impact on your choice. If so, make sure that usage is in line with any mortgage or HOA requirements.
Mobility and accessibility are huge concerns for older homeowners, so be sure to choose a residence in keeping with universal design standards, meaning it can be used and enjoyed with people of all ages and abilities. That includes a single-level layout or elevator access throughout, wide hallways, bathrooms with grips and wet room showers, accessible appliances and closets and so on.
Housing for Children or Students
As children go off to college or leave home to start their new lives, you may be inclined to assist with their housing costs, whether your motivations are as a caring parent or a shrewd investor. Helping your kids buy a home as young adults can impart financial lessons that will last a lifetime, and compared to throwing money at dorm fees or expensive rentals, it’s a move that can actually save money over the long term or even cover tuitions costs in just a four-year stint.
Students will gain the stability of not having to move each year or store belongings over the summer. On the downside, they’ll potentially lose the flexibility of changing schools or seeking employment in a new city, and of course, real estate investing isn’t always a guaranteed success.
When seeking a home for students or young adults living on their own for the first time, you’ll want to emphasize safety, proximity to school or work, long-term local employment prospects, and the potential strength of the area rental or sales market. Keep in mind that some HOAs, co-ops and condominiums don’t permit parents buying for children or co-purchases.
No matter how you go about acquiring a home for your children, make sure the ownership arrangements, maintenance and financial responsibilities of all parties are clearly spelled out, both in the long and short term. Be sure to speak to a qualified attorney or financial advisor to determine how best to structure the purchase, keeping in mind the ramifications of cosigning a mortgage as well as applicable gift or estate tax regulations.
If you’re searching for a property purely for investment purposes, look at it as just that: not as a home, but as a financial venture. For a rental, look for a property in move-in-ready condition in a strong rental market with a good likelihood of appreciation down the line. If you’re planning to flip, a fixer-upper with a bargain-basement price is your target. Examine the property tax rates, the quality of the local schools and the health of the area job market, then check out how long sales or rentals are sitting on the market.
With either a rental or flip, keep a close eye on financials; investment property loans have more stringent requirements and higher down payments than primary or even secondary residential mortgages. You’re responsible for short-term capital gains for your flip profits and income taxes for your rental income, plus you’ll need to cover utilities until your property sells or rents and have insurance in place for the duration of your ownership.
In general, buyers of second homes report that their non-primary properties are smaller and less expensive than their primary homes. Second homes are also more likely to be a townhouse, condominium or other multifamily arrangements. No matter the size or location of a second home or investment property, the advice of a skilled real estate professional is still important, especially because you will not know the specific local market conditions and idiosyncrasies as well as you do where you live full-time.