Investing in a Second Home or Vacation Home: What You Need to Know

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Posted on 08/02/2023

Things you should consider before purchasing a second home or vacation home investment
By Erik J. Martin

Yearning for a place to get away from the everyday? Looking for a property in a warmer climate you can flock to when Old Man Winter arrives? Want the flexibility to travel and vacation without having to find a place to rent or stay at a resort or unique hotel? If so, look closely at buying a second home or vacation home.

A second home is a property used as a secondary residence in addition to your primary residence. A vacation home, on the other hand, is a type of second home that is particularly used for leisure travel or vacationing.

“The main difference between a second home and a vacation home is the intended use of the property,” explains Andrew Lokenauth, a real estate investor and finance executive. “A second home may be used for a variety of purposes, such as a rental property or a place for extended family to stay, whereas a vacation home is intended primarily for personal use.”

A vacation home usually implies seasonal usage only.

“A vacation property typically would have different amenities, more recreational features like a swimming pool, fire pit, or expansive leisure area, as opposed to the amenities one might find in a year-round second-home like a home office,” says Scott Ehrens, a top-selling Realtor in Palm Springs, California.

Shri Ganeshram, founder/CEO of Awning, says worthy prospects for buying a second house include families or individuals who have a steady income and good credit and those looking for a place to relax and escape on the weekends or during holidays.

“Good candidates for buying a vacation home might include individuals or families who have a strong desire to have a specific vacation destination they can visit regularly and who have the financial means to purchase and maintain a vacation property,” adds Ganeshram.

Buying a vacation/second home can be a smart move and a wise investment under the right circumstances.

“Perhaps you are getting older and don’t want to wait out another market cycle, or you want to be closer to family while your grandchildren are still young,” Ehrens points out.

Either type of property can be rented out, providing a revenue stream that can help pay off the property if you take out a mortgage loan.

“Just be aware that a mortgage for a second home, or a vacation home mortgage, is different from a mortgage for a first home,” cautions Shelby McDaniels, channel director for Corporate Home Lending at Chase. “Note that, when applying for a mortgage for a second home, lenders may require borrowers to have a higher credit score, lower debt-to-income ratio, a larger down payment, and extra funds in reserve. With a first home loan, borrowers may be able to put down as little as 5%, depending on the loan type. For a second home, borrowers are expected to put down at least 10%.”

Also, mortgage lenders usually require that a second home or vacation property meet certain requirements, such as be occupied by the owner for some part of the year; be a one-unit home that can be used year-round; be a single-family residence, condo, or co-op if it’s a second-home; belong only to the buyer; not be rented or run by a management firm; and be located in a typical area for a second home, according to McDaniels.

It’s smart to answer crucial questions before committing to a second/vacation home purchase.

“Can you afford the upfront costs of purchasing this property as well as the ongoing expenses of maintaining and caring for it? Is the location convenient and desirable for your needs? And if you plan to use the property as a rental, will it be a desirable destination for renters and generate sufficient income to cover the costs of ownership?” asks Ganeshram.

Additionally, to avoid buyer’s remorse, Ganeshram recommends:

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