Is a Second Home a Smart Investment? Factors to Consider (2024)

After a surge in demand for second homes in recent years, the market for the perfect vacation home or investment property cooled off considerably in 2022, due in part to rising mortgage rates and high housing prices.1 Despite these challenges, the allure of the second home remains a part of the American psyche.

We see it as a place where family can gather over the holidays or on vacations for years to come, where we might start setting down roots in a future retirement location. We also view a second home as a possible income generator as a rental, and we look to it as a way to diversify our investment assets, because property values generally aren’t tied to the stock market.

All of that makes sense. But before you start scanning real estate listings, it’s important to get a full picture of the potential costs, especially because low inventory has kept prices elevated in many vacation home markets, says Craig Venezia, author of the best-selling bookBuying a Second Home: Income, Getaway or Retirement.

The first step is to decide whether you’re planning to rent out the home at some point or keep it solely for personal use, says Kathryn Thompson, a Merrill Financial Advisor in Albuquerque, New Mexico. “That impacts everything from affordability to the choice of property. If you might live in the house permanently someday,” she adds, “be sure to visit the area during the off-season. Understand what Florida is like during hurricane season, for example, or what spring is like in Montana.”

If you’re buying it as a vacation home, Venezia says, ask yourself how often you plan to visit. Agetaway to a remote lake can be wonderful— but will you grow tired of making the lengthy trek? “Unless you’re retired or can work remotely forever, consider a property that’s no more than a two- or three-hour drive from where you live.”

Whether you’re buying the home to rent out or for personal use, review the following questions with your advisor to see if this purchase might be a smart investment for you.

How will you finance the purchase?

“Interest rates for second homes are slightly higher than primary home mortgages, and you may need more than the standard 20% down payment,” says Michelle McLellan, Wealth Management Lending Products and Solutions executive at Bank of America.

You can write off mortgage interest on a second home loan— same as on a primary residence— up to a combined $750,000 for both residences.2

In a hot market, paying in cash can allow you to move swiftly to nab a home you want, so it might make sense to borrow against investments, using a Loan Management Account® (LMA® account) from Bank of America. “Ask your advisor to help you weigh the pros and cons of different financing options, as well as how the additional outlay might affect your progress toward other important financial goals,” Thompson says.

What about ongoing expenses?

The purchase price of the house is just the starting point. You may want to do an extensive renovation before you move in. Besides the basics like furniture and kitchenware, you’ll also be on the hook for recurring expenses like insurance, energy, Wi-Fi and landscape care.

Talk to your financial advisor about what trade-offs you might need to make to afford these ongoing costs. Your advisor should also run the numbers on some worst-case scenarios, such as having to overhaul the septic tank or covering a steep rise in homeowners’ association fees. “I tell my clients that if they can easily afford those unexpected things, in addition to the cost of the property, and it doesn’t put a stress on their budget or put other, more essential goals at risk, then chances are they can afford the home,” Thompson says.

How much rental income can you expect?

You might assume that the best rentals are those near tourist attractions, but while those homes sometimes command a premium rate, they’re often limited by seasonality, says Venezia. Beach houses and ski chalets, for example, often bring in cash for only three to five months of the year. In his experience, some of the highest occupancy rates are for long-term rentals— for instance, ones that cater to visiting faculty in a college town. Talk to a local real estate agent about features that renters in the area typically want, such as parking or outdoor space.

How will you manage the property?

You may be able to deduct mortgage interest, property taxes, operating expenses, depreciation and repairs, depending on how you use your second home.

If you’ll be using an online home-sharing service or a local real estate agent, you can expect to pay up to 30% of your rental income to the company that brings your renters in the door, says Venezia. And keep in mind that renting to others means a lot more wear and tear, especially if you’ll have a stream of short-term renters coming and going. Expect to spend another 20% of your budget for repairs, he says, and consider hiring a property manager or local handyman to help with maintenance. The upkeep may be more than you want to manage yourself as you age.

What tax breaks might you get?

The IRS considers a property that is rented for 14 days or less each year as a personal home, and in that case you can’t take deductions on any expenses. If you intend to rent out the place for 15 days or more a year, your mortgage rate will be higher, says McLellan, and a higher down payment will likely be required.

You may be able to deduct mortgage interest, property taxes, operating expenses, depreciation and repairs, depending on how you use your second home. You can maximize those deductions if your own personal use of the property does not exceed 14 days per year, or 10% of the number of days the home was rented to others at a fair rental price, whichever is greater, notes Venezia. Also keep in mind that some cities and states charge a lodging tax for rental revenue earned within their jurisdictions. Talk to your financial advisor and tax professional about the rules that may apply to your situation.

One final tip: After considering all of the above with your advisor, consult your heart— and talk with family members. Doing your homework before purchasing a second home can help ensure that you’ll continue to view it as a benefit, not a financial burden.

¹CoreLogic, “Demand for Second Homes Declines in 2022 and is Below Pre-Pandemic Level,” September 2, 2022.

²“Home Mortgage Interest Deduction,” IRS Publication 936, irs.gov.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

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