The Buyer's Guide: What to Know When Buying a Vacation or Second Home

Someday …hopefully sooner rather than later, I hope to own a second home where I can travel to on the regular. Where I haven’t decided yet since I already live in the greatest city in the world ;), but I know it will eventually happen, and that I’m not the only one who feels this way. According to the National Association of Home Builders, there were 7.4 million second homes in the U.S. in 2016, the last year estimates were calculated. That was 5.6% of the total housing stock in 2016.

While owning a second or vacation home is a wonderful benefit for many, it’s an investment that shouldn’t be entered into lightly. Potential buyers need to arm themselves with knowledge of the pros and cons, which include financing, upkeep and repairs, homeowner’s insurance, tax planning, and many other factors.

Tax breaks have changed

One of the first things Gregg brings up is an owner’s ability to deduct state and local taxes (SALT) on a second home. This has historically been a valuable tax break for taxpayers who itemize deductions on their federal income tax returns. But the Tax Cuts and Jobs Act of 2017 limits SALT deductions for 2018 through 2025.

These changes unfavorably affect individuals who pay high property taxes if, among other situations, they own both a primary residence and one or more vacation homes, which results in higher property tax bills due to owning several properties. People in these categories can now deduct a maximum $10,000 of personal state and local property taxes–even if they deduct nothing for personal state and local income taxes or general sales taxes.

The SALT change has done is made vacation homes, particularly in areas like downtown San Diego, less affordable because you no longer have the ability to deduct for that investment. It’s really hammered the states that have high income taxes and high property taxes.

What if you still want to buy?

Despite that tax change, how would you go about buying a second home if you really wanted to? If you have a 20% to 25% down payment, a number of lenders would be willing to work with you, as it’s a pretty standard mortgage for a non-owner-occupied home or a second home. The lenders feel pretty secure that you’ll make the payments. They still have to appraise the property, and you get a slightly higher interest rate than you would get on an owner-occupied home–maybe a half-percent or quarter-percent higher.

What about buying a second home and keeping it rented out all or some of the time?

There are several things to consider. A lot depends on the location of the second home, because there can be local rental restrictions. In downtown San Diego, most homes are in high- and low-rise condominiums. In that area, most of the buildings have restrictions on length of rental times, and there are a few buildings that have 30 days or less, but most have six months to a year minimum rentals. So it becomes a little more challenging to have your house rented for six or eight months and then you move in and enjoy it for two or three months. It’s possible, but less likely. And that’s mainly the building’s intent, to protect the building itself by having it not a turn into an Airbnb or a hotel room, but a building where people live in it and typically take better care of the facilities and are better neighbors.

Should owners set aside funds for maintenance, repair, and other items?

If you’re buying a condominium, yes, because it’s required in your homeowners association dues. Some people struggle with that, because they don’t like paying monthly HOA dues, even though they cover common-area items such as roof leaks or sprinkler repairs. If you buy a single-family home, you may live in it for 20 years and never have to replace the roof, so you’ll never have that expenditure. If you’re smart, you would put some money aside for maintenance to take care of it. If you’re in a condominium, it’s done, period. The only thing you maintain is the interior things like paint and carpet, like any rental would be. And just like your primary residence, homeowner’s, earthquake, and other insurance should be factored into the costs of owning a second home.

What should the first steps be if someone wants to proceed?

Renting a place at different times of the year to get an idea of the area: “Ask yourself, ‘Would I like to live here full time? Is there enough to engage me in this region?’ If there is, you need to start looking at the neighborhoods, and making sure that you’re getting into one that’s going to retain its value.” You can do this by working with an experienced real estate agent who is familiar with the area. Ask to see purchase and sale prices of comparable homes nearby (comps). Talk to the neighbors. Visit day and night. See how long it takes to reach shopping, entertainment, and medical facilities. Go through all the same procedures you would in buying your primary residence.

Any drawbacks to buying a second home?

Having been in the business, one of the most interesting things is that most people who buy a second home regret the decision after four or five years. And the reason is that every time they can take a vacation, they feel like they have to go there. They think, ‘Well, it would be nice to go to Europe, but we bought this house in San Diego so we better go there.’ So do your homework before you get that second home.” So keep that in mind before you make this big life decision!