6 Questions to Ask Before Buying a Second Home

Thinking about buying a second home or vacation home? Here are a few things you should know.

What is the difference between a second/vacation home and vacation rental? A second/vacation home is a residence that is occupied by its owners but it is not their primary residence. The second home can be used as a vacation spot, weekend residence or business residence (for example having an apartment in the city that is used during the week). A vacation rental is purchased to generate income.

There are some people who elect a hybrid model, a vacation rental that is also used by the owner often. For example: a mountain cabin where you and your family spend 60 days a year and the remainder of the year (or let’s say 180 days) it is rented out using a vacation rental agency. How does this hybrid model break down for tax purposes? Take the ratio of days rented out by total days used (180/240). The percentage that is calculated will then be used to calculate the percentage of rental vs. personal use for tax purposes.

Before buying a second home, there are many factors to consider.

Before Buying a Second Home or Vacation Rental, Answer These Questions

  1. Are you looking at the property to create income or for enjoyment?

    If your answer is, “I want to invest in a second home to create income”, focus on buying a vacation rental in a location where it is possible to create steady income all year. An example would be a condo by a ski resort that also has summer activities so there isn’t just one high season. Also, make sure that it will rent at a minimum of breakeven.

    If you said enjoyment, make sure the vacation home you choose is someplace that you can see yourself and family getting to on a regular basis to take full advantage. If it is too far away from your primary residence or not one of your favorite places, it may end up being a bad investment for you.

  2. What is your long term goal for the property?

    It is important to know what your long term goal is for the property, but also be willing to be adaptable. Our goals sometimes have to be re-evaluated as our circumstances change over time. Go into the deal fully aware of that.

  3. Could the property end up becoming a primary residence?

    An additional layer of analysis needs to be done if the property could become your primary residence (say in retirement). The tax treatment will change if you convert the property from a vacation home to primary residence. You’ll want to know what the financial impact could be.

  4. Do the numbers work for you now and in the long term?

    Make sure the numbers work as a second home (can you afford two mortgage loan payments without stress?) Knowing the financial impact the property is going to provide today, in 5 years, in 10 years and so on is important to your overall financial planning. No one can predict the future, but having a plan makes it is easier to adapt than working from the unknown.

  5. Are you looking for additional tax benefits?

    If you are looking for tax benefits, the hybrid method of having a second home can create a nice tax benefit without the restriction of only 14 days of usage to have the property qualify as an “investment” property. Talk to your tax professional for more details on this.

  6. How far away is the home from your primary residence?

    This question is important when it comes to financing the property. Lenders will often look at the distance and location of the property to determine if they feel it’s a vacation home as opposed to a rental. So, you need to check with your lender as to their parameters. And to reiterate, a vacation home that is too far from your primary residence or not in a location you are drawn to could make you regret your decision to invest in a second home.

Once you have a clear answer to these 6 questions it is time to consult your tax advisor, realtor and mortgage lender. This team will be integral to the process of making your dream of owning a second home, whether it be an investment property or a vacation home, a reality.

Free Class
Online Trading Academy logo