As noted in a recent post, Should I Invest in a Second Home?, a second home can take many...
Should I Invest in a Second Home?
Enthusiasm for second homes boomed during the COVID-19 pandemic due to the millions working remotely and low mortgage interest rates. While less favorable rates have cooled the market, many people continue to explore the prospect of a second home as:
- A getaway from the dreary day-to-day routine
- An escape to better weather
- A future retirement location
- A way to be closer to family
- An investment or income opportunity
- An opportunity to join a new community and build relationships
Often, it's common that a combination of these reasons motivates interest in a second home.
If you're curious about the second home option, it's important to understand the details of what establishing a second home entails.
What is a Second Home?
First, the term suggests you are dividing your time between two or more homes. (For this eBook, we'll confine the discussion to two homes, main and second.) A key point is that you stay in the second home at some point while it's in your possession. It can hardly be called a second home if you purchased a residence purely as an investment and never set foot in the place.
Second, such a home might not only be something you purchase but also a rental of some type. Rentals can range from a twelve-month lease to something you rent for a shorter period.
Third, a second home can take a variety of forms. Typical examples are:
- Condominium or apartment
- Mobile/manufactured home
- Recreational vehicle or trailer
Although some of these would make for an unconventional residence, the IRS considers each to be a "qualified home" if it has sleeping, cooking, and toilet facilities.
Fourth, ownership types differ. Ownership can be full or partial. Also, you may not own a second home but have contractual rights to use of the home for a specified period, such as a timeshare. Of course, all of these differ from a rental where you don't own the home at all.
Fifth, second homes vary in terms of how much time you spend there. This may be driven not only by your personal preferences but also by tax laws or the form of ownership. For example, states with income and other taxes for residents require owners of out-of-state homes to report how much time they live in both residences. Owners living a certain number of days or more annually in the state must pay income and other taxes.
As for the form of ownership, full owners can usually spend as much time as they choose in the second home, while partial owners are limited by contract to specified periods of time or number of days. Similarly, timeshare contracts dictate the amount of time that can be spent at the property.
So now that we have a better idea of what constitutes a second home, let's dig deeper into the question of why you might want one.
Second Home: Why?
As noted above, you might establish a second home for multiple reasons.
- A retreat from your main home and location
- An eventual home in retirement
- A way to be closer to family
- An investment or income property
- Joining a new community
Let's cover each of these alternatives in detail.
A second home can serve as a place for shorter periods like vacations or weekends. It can also be a place you live for months at a time.
You may intend the second home entirely for leisure, as a location for remote work, or a combination of both. No matter what the amount of time and ways you spend your time, there can be any number of benefits to the second home location:
- Preferable weather
- Lifestyle differences. For example, country living versus city hustle-bustle
- Geography features like coasts, mountains, forests, or wide-open spaces
- Cultural attractions like museums, performing arts, learning institutions, or sports
One of the downsides of a second home getaway is it often generates reluctance to take vacations in other locations. You may not feel you can afford to vacation elsewhere while paying a mortgage payment or rent on the second home.
A Home for Retirement
Those contemplating their post-career future may establish a second home as an eventual retirement location. This could work as a multi-purpose strategy. When first purchased, the property can serve as a vacation getaway. However, in the long term, the property could become one's primary home (or only home) in retirement. This strategy allows the buyer to confirm that it's a place they'd like to live full-time. Also, once they retire, they can already be plugged into the local community, thereby easing the transition into retirement.
Being Closer to Family
As parents become empty nesters, adult children and their families may reside in different locations. A second home in that location can maximize time with family, especially grandchildren.
An Investment/Income Opportunity
Purchasing a second home means you are acquiring an asset that could fluctuate up or down in value. Usually, this pertains to a real estate asset. Except for the 2008 crash, real estate value appreciation has been the norm in most markets over the past few decades. Therefore, most second-home buyers could be reasonably confident of future profit.
A further economic advantage of a second home would be as a rental. Many families who might not otherwise be able to afford a second home set up their property for rental income to offset the costs they would not otherwise be able to cover.
A New Community
When considering a second home, don’t underestimate the social factor. Suppose you have found the perfect winter retreat. Yet, once the novelty of the new place begins to recede, it's not uncommon to feel a little lost. A big reason for this could be that you’re separated from your normal social connections. Even if your second home is in close proximity to family, forging new social connections outside the family circle is important.
You may move into a community that has built-in social events and activities. This makes the effort to make new friends a lot easier. Otherwise, you’ll need to take steps to make new connections. Suggestions for doing this are:
- Introduce yourself to the neighbors
- Throw a housewarming party
- Join local civic, sports, volunteer, or religious groups
- Have a yard sale
- Take on a part-time job
Putting down roots in a new location takes time, but when you make new connections, your second home will start to truly feel like a home.
This high-level review of the what and the why of a second home only starts the conversation. Subscribe to our blog so you don't miss upcoming posts covering topics such as:
- Buying versus renting
- Ownership: Full or Partial?
- How do Timeshares and Fractional Ownership differ?
- What is the investment/income potential for a second home?
- What are all the costs of a second home?
- What Are the Different Types of Second Homes?
- Second Homes: Buy or Rent?
- Second Homes: Full vs. Partial Ownership
- Second Homes: What Is Fractional Ownership?
- Is a Second Home a Good Investment or Income Opportunity?
- What Does a Second Home Really Cost?
Looking for other related content? Check out our Housing Resources page!