The Advantages & Disadvantages of Buying a Second Home

Whether you're just starting your career or nearing retirement, reasons to buy a second home range from having a vacation home for your family to using the property to generate rental income that helps cover your daily bills. While buying a second home can make your life more flexible, provide some tax benefits and offer financial benefits, you should also be aware of the expenses, hard work and risks involved. Understanding both the advantages and disadvantages of owning a second home can help you decide if it makes sense for your financial situation and family.

Whether you're buying your second home as a vacation home, rental property or secondary residence, owning a second home can come with financial benefits as well as the advantage of a more flexible lifestyle.

• Potential rental income: If you're looking for some additional income, one of the benefits of owning a second home is that you can potentially rent it out and make enough money to cover the house's mortgages and expenses as well as have some profit left over for daily living costs. One option is to lease the place out monthly with a long-term contract. You could also take advantage of short-term rental services like Airbnb and Vrbo to rent to vacationers and business travelers on a more flexible daily, weekly or monthly basis.
  
• Potential property appreciation: A second home can also be a good investment if you buy a property in a neighborhood with rising home values. Between 2013 and 2017, the Federal Housing Finance Agency discovered an average home value increase of 6.94 percent annually, which added up to 34.71 percent over those five years.
  
• Use as a vacation home: Whether your family takes a few trips each summer or you're a retiree who wants to spend several months each year in a more desirable climate and location, you can use your second property as a vacation home. You may find this more convenient than renting out homes or hotel rooms during trips and more comfortable too, since you can customize the place to fit your family's needs and tastes. Having a second home where you can visit on a moment's notice can be appealing and freeing.
  
• Flexibility in where you live: In addition to having somewhere to go on vacation, you gain the benefit of flexibility in where you live. This can come in handy if you want to relocate for a new job without giving up your primary home. And even when you don't live in the home, you have the flexibility to allow other family members to stay there.
  
• Tax benefits: The Internal Revenue Service gives you some tax breaks as the owner of a second home. For the 2019 tax year, you can deduct up to $10,000 in property taxes per return, and if you rent out the home two weeks or less each year, that rental income is tax-free. As long as you don't live in the house more than two weeks a year (or 10 percent more than the days you rent it out), you gain benefits like being able to deduct some maintenance costs and rental expenses.
  

While owning a second home can be a good investment opportunity and possibly improve your quality of life, there are several costs and risks to consider when making your decision.

• Ownership costs: One of the main disadvantages of owning a second home is that you have to pay for all the ownership costs just like you do for your primary home. Unless you pay for the property in cash, you can expect a monthly mortgage payment along with property taxes, homeowners insurance, regular maintenance costs and all utilities (unless you rent the home out and have the renters pay most expenses). In addition to these regular costs, you have to account for emergencies that can put you back thousands of dollars, such as needing a new roof or plumbing.
  
• Tax complexity for rentals: When you rent out the second home for more than 14 days a year, the IRS considers it a rental property. This means you'll have to count the money you receive from renters as regular income on your tax return and pay taxes on it. You can deduct costs for fixing up the rental property and doing regular maintenance, but you'll need to consult a tax professional since proper accounting can get complex.
  
• Potential distance: If you purchase your second home somewhere not within regular driving distance, it can be hard to check on it to make sure it's still in good condition. You may not know until several weeks later if a storm damaged your home's roof, if someone broke into the home or if some vandals defaced your property. Unless you hire someone who can watch the house from time to time, or you take advantage of security systems and cameras, the distance can be a risk.
  
• Potential financing hurdles: Depending on the planned use of the second home, you may find it more challenging getting financing and need to consider alternatives to conventional mortgages. For example, you may be able to use a cash-out refinance on your current home, but only if you've built up enough equity to cover the loan amount for the second home. You could also apply for a regular conventional mortgage, but you'll need to meet lenders' debt ratios, income requirements and other factors, which can be difficult if you have a lot of debt and still owe a substantial amount on your primary residence. If you do use the home as a rental, lenders usually allow you to consider that income in determining whether you qualify for financing, which can help, but you may need some documentation like a signed lease contract.
  
• Ongoing maintenance work: Maintaining a single home takes a lot of work, so adding a second property will double that for you. This can mean spending your days off work traveling to the second home to clean it, do basic repairs and maintain the lawn. Of course, you have the option of hiring others to take care of the home, but keep these added costs and hassles in mind when making your purchase decision.
  
• Work and risks managing rentals: Along with the potential rental income comes the work required to manage the property and deal with tenants' requests. You could hire someone else as a property manager if needed, but this cuts into the money you'll make from the rental. Also, you have to deal with the risk that the tenants may not treat the property well and could cause damage that will cost you a substantial amount to repair; purchasing landlord insurance can help remediate this risk.
  
• Potential depreciation: Although your second home may grow in value, there is no guarantee this will happen. You may buy a second home as an investment but then become the victim of falling property values due to the neighborhood or economy becoming undesirable.
  

When deciding whether buying a second home is a good financial decision, consider whether you can afford the down payment, monthly mortgage cost and ongoing expenses. If you plan to buy a place to rent out, investigate the area and its market rental costs to get an idea of how much rental income you'd generate and compare it to the bills associated with the second home. If you're buying a vacation home, consider whether the time you'll spend there justifies the cost and whether renting the place out when you're away would be a good option to consider. Meeting with a real estate agent and a local lender who better understand the market and second home financing options can help guide you through your purchasing decision process.