Real Estate Investing Education Center

Buying a Second Home as an Investment Property

By Michelle Clardie on 05/01/2022
Buying a second home is one of many lucrative ways to invest in real estate. A second home can serve as an investment property, a vacation home, or a commuter home. Whatever your second home’s primary purpose, you can benefit from the long-term appreciation and tax benefits that come with property ownership.

In this article, we’ll discuss:

  • the most common reasons for buying a second home, 
  • how to invest in a second home, 
  • additional considerations for your second home, and 
  • alternative ways to invest in real estate that maximize the pros and minimize the cons. 



Reasons to Buy a Second Home


Let’s look at some of the most popular reasons to buy a second home, and how each reason can impact your finances and your lifestyle. 

Investment Property


“Investment property” can mean a few different things, including:

  • Buying a home to be fixed and flipped for immediate profit.
  • Purchasing a condo as a short-term vacation rental.
  • Investing in rental property for long-term renters.
  • Or even owning a multi-family development to serve as apartments for multiple sets of renters.  

Whatever investment property type you have in mind, real estate investments have a few pros and potential cons.

Pros of buying investment properties:

  • Income (either as a lump sum upon selling your fix-and-flip or as recurring rental income for buy-and-hold rental properties). 
  • Tax benefits. You can deduct expenses (like mortgage interest, property taxes, and maintenance expenses) from your earnings for income tax purposes. And real estate is eligible for 1031 Exchanges, which can defer your capital gains tax liability.  
  • Net worth gains. As your property values increase, your net worth grows. This is the key to becoming a millionaire through real estate investing.

Cons of buying investment properties:

  • It can be more difficult to qualify for financing. To qualify for an investment property mortgage, you’ll typically need a higher credit score, a larger down payment, and a debt-to-income ratio of under 43 percent.
  • Investment property loans often come with higher interest rates than primary homes. 
  • Investment property ownership can be time and labor-intensive. While this provides an exceptional learning experience, not all property owners have the time or desire to manage income properties themselves. Of course, you can use a property management company; just make sure you budget for this added expense.   

Vacation Home


Having a place to escape to is a great reason to buy a second home! Your vacation home can be a weekend destination or a place in which to spend the entire summer. Or both. Whatever your use, you’ll benefit from the long-term appreciation. And you can even rent out your vacation home when you’re not using it (you just need to classify it as an income property for financing and tax purposes if you rent it out for more than 14 days per year).

Pros:

  • Having a relaxing retreat for a regular change of scenery. 
  • Being able to share your vacation home with family and friends.
  • Long-term appreciation.
  • Rental income (if you decide to rent it out when you’re not using it personally).

Cons:

  • If used solely as a vacation home, it might sit unoccupied for much of the year, costing you fees like mortgage expenses and property taxes without providing direct benefits.
  • Your financing will depend on whether your plan to have your vacation home double as an income property, but either way, financing requirements will be more strict than with your primary residence.
  • If the property sits vacant for long periods, you might not learn about issues like leaks or weather destruction until substantial damage is done. 



Commuter Home


With the work-from-home opportunities uncovered by the COVID pandemic, proximity to workplaces has become a less important factor in buying primary homes. But many employees still work a hybrid schedule, perhaps commuting only two or three days per week. In these cases, having a commuter home near the workplace might be a good investment. 

Pros:

  • You have a convenient place to stay a few nights a week when you need to be in-office. 
  • You benefit from the value growth of the property.
  • You can potentially use the space as a short-term rental on weekends for added income (again, you would need to classify it as an income property for financing and tax purposes if you rent it out for more than 14 days per year)

Cons:

  • The property may sit vacant for a substantial percentage of the year.
  • Financing requirements will be more strict than with your primary residence.
  • Prices for real estate may be higher near your workplace than in the suburbs or rural areas.


How to Invest in a Second Home


Whatever your reason for investing in a second home, the process for buying a second home as an investment property is similar to the process of buying your primary residence.

Here is an overview of the process, with steps unique to second home investment called out in bold:

  1. Decide on your goals. Failing to establish a specific goal for your investment property is one of the mistakes to avoid when investing in real estate.
  2. Pre-qualify for a mortgage. This will confirm your price range and show sellers that you’re a serious buyer. 
  3. Work out your budget. Just because you qualify for a large loan doesn’t mean you would be comfortable with those mortgage payments. Don’t forget to factor in maintenance expenses as well.
  4. Partner with a real estate agent who can help you find the right property and represent your interests in the transaction.
  5. Start your house hunt.
  6. Work the numbers carefully for each serious contender. Buying a primary residence is more about finding a house you like on a personal level. But when you’re buying a second home for investment, it’s more about the financial return on your investment. So the numbers have to work.
  7. Make an offer when you find the right property.
  8. Navigate the escrow process, including inspections, the appraisal, and your loan funding.
  9. Close on your new home!
  10. Create your marketing plan. If you’re planning to rent out your second home, you need to decide on rental rates and figure out where you’ll find qualified renters. 

Other Considerations 


There are a few additional things to consider before buying a second home as an investment:

  • Rental income is taxable. Don’t forget to budget for income tax on your profits.
  • Make sure the property is properly insured, especially if you’ll have short-term renters coming and going.
  • If you’re considering investing in a second home for the purpose of housing family members nearby, consider adding an accessory dwelling unit to your primary residence instead. This increases the value of your property and can be simpler than buying and maintaining a separate property. 
  • There are easier ways to invest in real estate than managing a second home as a rental property. If you don’t need the property for a vacation home or commuter home, consider real estate syndication as a more convenient investing strategy. We’ll outline this option in the next section. 

Investing in a Second Property with Gatsby Investment 


Gatsby Investment is a Los Angeles-based real estate syndication firm that makes it easy for investors to build a real estate portfolio. Instead of investing a large down payment in a single property that you have to renovate and manage yourself, you can buy shares of professionally-managed real estate projects for low minimum investment amounts. 

With project durations of six months to five years, we can cater to short-term and long-term investors. Gatsby offers a wide range of residential investment types, including:

  • Single-family flips,
  • Single-family rentals,
  • Multi-family developments,
  • Multi-family rentals,
  • And even luxury homes.

You won’t need to lift a hammer, manage a contractor, or screen renters. Our experienced team of real estate analysts, architects, builders, designers, and property managers will expertly handle every aspect of your investment for you! All you have to do is:

  1. Sign up with Gatsby Investment,
  2. Get verified as an accredited investor,
  3. Choose your projects(s),
  4. Place your investment,
  5. And watch the progress on your property from our convenient online portal.

Investing in a second property has never been easier or more fun. Get started with Gatsby Investment today!

Investment opportunities