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How to Buy a Second Home

September 23, 2022
Exterior of Broadway at Boulevard by Brookfield Residential in Dublin, CA

Real estate can be a great investment when you want to diversify your portfolio and earn steady income over time. You can also invest in real estate as a short-term project, when you improve a home with the intent to flip it and gain a profit.

You may wonder how you can buy a second home to upgrade it and flip it or how to buy a second home and rent your first home. You may also be considering purchasing a second home as a vacation home for your family.

This guide offers some considerations for buying a second home and what to expect in the process.

Financial Reasons to Buy a Second Home

As some high-profile U.S. millionaires told CNBC, good reasons for owning a second home include:

  • The home’s growth in value can quickly outpace other investments. To illustrate, look at the growth of the average sales price of houses sold in the United States, from 1965 to present day.
  • A second home can produce reliable year-round rental income.
  • You can maintain more control over your investment compared to other types of investments whose performance depends on external factors such as stock market performance.
  • Real estate is typically always in demand, more some years than others.

Determining if a Second Home is Right for You

It takes time and effort to buy a second home compared to trading on the stock market. The rewards, however, can be much greater. You’ll want to be realistic about the:

  • Upfront funds you’re willing to invest in the home purchase and any needed updates
  • Amount of time you can dedicate to the homebuying and homeownership process

Costs and Taxes

If you’re in a position to pay all cash for your second home, you won’t need to consider a down payment, closing costs, and a monthly mortgage payment. However, like those who will borrow money to pay for the home, you’ll still be responsible for paying property taxes and insurance on your second home.

The IRS says that you can generally deduct mortgage interest paid on a second residence, if the mortgage meets the same stipulations for deductible interest as on a primary home. The total deduction for all local and state taxes is limited to $10,000, or $5,000 if you are married filing separately.

A second home could impact your tax situation if you’re using it as a rental property. Consult with your accountant to get a clear view of how the purchase will impact your finances. Generally, you’ll owe income tax on any rental income, but there may be more deductions available, on items like utilities, maintenance and renovations.

Time and Upkeep

If you plan on buying a second home as a rental, there can be extra time involved if you’re also planning to serve as the landlord or property manager. There are property management groups you can pay to handle most or all of the landlord responsibilities. A property manager can be a good option if you live in another state or far away from your second home or your rental property.

Also, consider the condition of the second home. A move-in-ready, new-build second home will be ready to enjoy with no upgrades needed. That can help you generate positive cash flow more quickly.

Alternately, if you’re buying a home you plan to renovate, it will require extra time and a financial investment to get it ready for you or a tenant to live in.

Once you’ve determined that you’re financially capable of owning a second home, you can start looking for a vacation property, a property to rent or another type of second home for you and your family.

How Can I Buy Second Home?

The steps for buying a second home are similar to buying a first home. A main difference is that programs for first-time homebuyers, such as those offered by the Federal Housing Administration (FHA), typically won’t be available to you. You’ll also need to have enough disposal income to make the down payment that’s required.

When you’re ready to start the homebuying process for your second home, follow these steps for a smooth transaction.

1. Get Preapproved for a Mortgage

Talk with a lender to apply for loan preapproval and to learn how much of a mortgage you’re likely to qualify for. It can help you understand the homes you can afford before you start shopping for a second home.

Preapproval is also helpful for increasing your standing as a buyer, especially if there’s a lot of competition for the home you’re interested in. Being preapproved shows the seller that you’re a serious buyer and qualified to purchase the home.

How you intend to use your second home can impact what type of loan you’ll qualify for and how much you’ll be able to spend on a monthly mortgage.

For example, if the home will be an investment property, you may not qualify for loans like a jumbo loan, but you may qualify for a conventional loan. If you plan to use the home as your own family’s vacation rental instead of renting it out year-round, that may decrease the amount of income you’ll generate to cover monthly mortgage costs.

2. Budget for a Second Home

Once you have loan preapproval, you’ll want to create a budget that includes all your expenses to get an even clearer picture of what you can afford. This is an essential step in the home financing process, since the expenses you’ll have on top of a mortgage could decrease the loan amount you can comfortably afford.

As you create your budget for a new home, consider the true costs of home ownership, including:

  • Renovations
  • Repairs
  • Property taxes
  • Insurance
  • Utilities
  • Maintenance
  • Vacancy, if the home goes unoccupied for a certain amount of time

If you want to avoid having to deal with time-consuming costs such as repairs and renovations, a new construction home can help you start earning money more quickly if you plan to lease it out.

3. Connect With a Real Estate Agent or a Home Builder

A real estate agent can help you navigate the process of purchasing a second home that will provide value to you long term. Location is typically one of the most important factors that will make a home a good investment.

If you’re interested in purchasing a new home from a builder, the good news is you can work with a dedicated selling agent from the builder who can help you every step of the way. Another benefit of getting a new home build for a second home is that builders typically choose desirable locations that are expected to increase in value.

A Second Home Can Be a Great Investment

A second home can benefit you in a lot of ways, from giving you a place to stay on vacations, to providing you with extra income if you rent it out or upgrade it and flip it. When you own the home long-term, it can increase in value and may provide a substantial return on investment if you decide to sell it.

You can purchase a second home as an upgrade for your own family home and consider renting out your old home. If you have the financial means and can commit time to the homebuying process, you may see advantages from purchasing a second home.

One way to make the second homebuying process easier is to work with a new home builder. In addition to building new homes, builders frequently offer move-in-ready, turnkey homes or homes that are in various stages of construction. Brookfield Residential selling agents can help you through the process of making a second home purchase dream your reality.

Contact us to find your dream home in the places you want to live.