Prospective buyers today face soaring real estate prices and increasing interest rates, making the dream of homeownership in high-population city centers feel out of reach. At the same time, changes in how (and importantly where) we work make escaping the urban grind—at least part time—more feasible. The upshot is that more people are choosing to keep their rentals and buy their "second home" first.
In certain markets—like where I live and work as a Realtor® in upstate New York—buying your second home first can be a great option. It gets you on the ownership ladder, provides peace and space your rental may be lacking, and, in some instances, can provide extra income. Many of my clients are doing exactly this, and here's my advice to anyone starting their second-home search.
But, first: What is a second home?
Generally speaking, a second home is one that isn't your primary residence, i.e. the place you live for the majority of the year. It's a vacation home, a pied-à-terre, a cabin in the woods. Seems pretty straightforward—and it is, with a few caveats.
- You can only have one primary residence. Even if you plan to split your time equally between your two homes, you can only have one primary residence for legal and tax purposes.
- If you plan to rent your second home 100% of the time, it's an investment property. According to the IRS, your home qualifies as a second home if you visit that home for at least 14 days or use the home 10% of the days you rent it out. If you don't, it's an investment property—and that's a whole other can of worms.
So, before you keep reading, figure out if the home in question is truly your secondary home. If it is, here's what you need to know.
There are stricter requirements for financing a second home.
Buying a home as a secondary residence can be a bit trickier than buying a home as a primary residence. For starters, some loan products may not be available to you. For example, a vacation home doesn't qualify for an FHA loan, so you'll have to go the conventional route. In terms of a down payment, vacation homes typically require at least 10%, but 20% or more is not uncommon depending on your financial situation and local market. Finally, credit and income requirements are also likely to be more stringent, and your interest rate will be a bit higher than on a primary residence.
A second home offers some tax benefits.
As far as tax benefits go, mortgage interest and property taxes still qualify as federal deductions (with caps). On the other hand, certain state and local tax-rebate programs, such as the STAR program in New York, are only available for primary homes. And while primary residences are eligible for capital gains exemptions, secondary residences are not.
Pro tip: Always be mindful that tax rates can vary significantly depending on the township and school district. A 10-minute drive could mean a difference of thousands of dollars a year.
Renting out a second home is trickier than you think.
In markets all across the country, cities and towns are cracking down on short-term rentals. In some cases, restrictions can become so onerous as to make renting virtually impossible. Additionally, short-term rental laws can change at any time; being able to rent this year doesn't mean you'll be able to do so indefinitely. Even without restrictions, your home is not guaranteed to be financially productive. The most lucrative rentals typically require significant upfront investment on things like furnishing and staging, hiring a professional photographer, and proper marketing. You can do all the above and still struggle to find your market. Success is not a sure thing.
And don't forget: Running a short term rental can mean 3 a.m. phone calls about leaking pipes, a holiday weekend spent dealing with a septic issue, or noise complaints from unhappy neighbors.
A second home requires maintenance and repair.
If you've never owned a home before, maintenance and repair items can get overwhelming pretty quickly. Rural and small-town living often means your home is its own little service island. There are rarely conveniences like sewers or natural gas lines. You may need to understand and manage septic systems, wells, private roads, discrete fuel supplies, and more.
Do you know who you need to call if you have a fallen tree that needs to be removed or if your well pump suddenly stops working? You need to learn! It's important to gather information on these things before you need them. Otherwise, you might find out what it's like to be without fuel oil for three days during the coldest week your mountain town has seen in decades (been there, done that).
Pro tip: Being educated and proactive can save you a lot of money and heartache in the long run. Always ask your agent for a list of recommended utility and service providers from the sellers before closing, and set calendar reminders for important maintenance items like your boiler service, chimney clean, and septic pump.
A second home is an opportunity to be a part of a community.
There are a lot of technical aspects to buying your vacation home first, but it's also an opportunity to be a part of a wonderful community. Talk to your neighbors—they'll have the best advice for what plants will grow well in your garden; know the calendar for big local events—and make a point to attend; and if you have the time and expertise, volunteer for community organizations. At the very least, become a treasured regular at a local business. Your second home is still a home, and you'll benefit by treating it like one!
