Thinking about buying a second home? Owning a secondary property can be a smart investment for your future, offering opportunities for additional income or regular travel to a beloved locale. However, purchasing real estate that will not be your primary residence requires careful planning and consideration. Here are some tips to help you get started.
What Is a Second Home?
A second home is a property purchased in addition to your primary residence, intended for part-time living. Secondary homes can serve various purposes, each with their own financing requirements. They differ from typical investment properties, as lenders often impose restrictions on when you must occupy the residence and when you can rent it out to potential tenants.
The most common uses for a second home are as a vacation home, a secondary residence, or an investment property.
- A vacation home is ideal for large families, those who vacation in the same area often, or those who want a home away from home. Jumbo or conventional loans are common for financing, and the mortgage process is similar to a primary residence loan with slightly stricter requirements.
- Using your second home as a secondary residence can be typical for those who travel frequently for work. As with vacation homes, mortgages for secondary residences commonly have stricter requirements.
- A second home as an investment property usually means the owner will flip and resell it or turn it into a rental property. Keep in mind that investment properties have different mortgage rates and requirements than other types of second homes. Jumbo loans typically cannot finance these properties if they are rented out more than 14 days a year. Conventional loans allow rentals up to 6 months, while Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans cannot be used for investment properties.
Consult your mortgage lender to ensure your loan aligns with your investment goals.
Financial Factors
Now that you’ve decided you would like to acquire a second home...can you afford it? Ensure your finances can support a second home, even if it remains vacant for months. Consider these factors.
Down Payment and Interest Rates
A higher down payment is required for a second home than a primary home due to increased risk for lenders. Expect higher interest rates as well.
Debt-to-Income Ratio (DTI)
To qualify for a second mortgage, your DTI should be 43% or less. You can calculate your DTI by dividing your monthly debts by your pre-tax income.
Additional Costs of a Second Home
- Insurance: Homeowners insurance for a second home is typically more expensive than for a primary residence. Different types of insurance may be needed depending on the occupancy and rental terms.
- Utilities: If rented, tenants may cover utilities, but if the home is left unoccupied for long periods, you will need to balance necessary energy use with cost control.
- Maintenance: This can include major seasonal upkeep as well as basic maintenance. A property manager can help but adds to costs.
- Vacancy: If you plan to rent the second home, ensure you can cover expenses during rental gaps or dry spells.
- Travel: Budget for trips between your primary and vacation homes, as appropriate.
Next Steps
Now that you’ve determined purchasing a second home is financially feasible for you, how do you get started?
- Set your goal: Determine how you plan to use the second home and assess its pros and cons, including if it fits into your future financial picture.
- Create a budget: Calculate the cash needed, potential borrowing amount, and ongoing expenses.
- Compare lenders: Choose your loan type, shop around, and get preapproved. Consider alternatives like a home equity line of credit (HELOC), securities-based line of credit, or cash.
- Start shopping: Work with a local real estate agent to find your second home.
Buying a second home can be a rewarding investment, providing both financial benefits and personal enjoyment. Plan carefully, understand the financial requirements, and consult with professionals to make informed decisions. With the right preparation, your second home can be a valuable asset and a cherished retreat.
This material is being provided for educational and informational purposes only. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Copyright D.A. Davidson & Co., 2025. All rights reserved. Member FINRA and SIPC.