Buying a Second Home: Is It Time?

The pandemic-driven housing boom has shown signs of slowing lately, in part because higher mortgage rates are forcing buyers to the sidelines. But prices continue to rise. The Case-Shiller index, a national composite of home prices, rose 19.7% year-over-year in May, according to the most recent data available.

Despite the sticker shock, many Americans are searching for a second home to serve as a weekend retreat or simply to elevate their quality of life. Both are decent reasons if you can find a property that fits your finances. Before taking the plunge, ask yourself some practical questions to decide if the time is right.

Do I know the total costs? A second home adds a slew of new fixed expenses to your budget. As with any home purchase, you’ll need estimates of property taxes, insurance payments, mortgage payments, maintenance costs and utilities when considering buying. And how much will upgrading that 1950s kitchen really cost?

Do I understand the tax implications? You can defray the cost of owning a second home by claiming tax deductions for mortgage interest, property taxes and rental expenses. But there are also tax liabilities to consider: For one, you will need to report income to the IRS if you rent your home for more than 14 days in any calendar year.

Do the numbers work for me? We often advise clients to pay off the mortgage on their primary home before buying a second property, even if they plan on renting it out. As the pandemic made clear, demand for vacation rentals can fluctuate, so you may not be able to count on rental income to make the numbers work.

Buying a second home might be the right move so long as it doesn’t derail your progress toward other long-term goals, like paying for college or retirement. If you’re on the fence, we’d be happy to help you crunch the numbers and think through your options. Let us know!