Investing in a second home for vacation or retirement: What to ask yourself first

the sun reflects off a home on a lake

If a second home is on your wish list, you may want to explore your options.

There are potential advantages and disadvantages to purchasing a second home, says Kelli Hill, senior director of advice at Wells Fargo Wealth & Investment Management. Here, Hill shares two important considerations and three key questions to ask yourself before making the decision to invest in a second home in retirement or even sooner.

Consider rental income — and what renters want

Investing in a second home now to use as a vacation home now could help you build equity over time. It may also provide a potential revenue stream through full- or part-time rental income. You could even use that rental income to help cover the costs associated with the property, whether that’s maintenance and upgrades or ongoing mortgage payments. Plus, it may be easier to qualify for a second mortgage while you’re still fully employed because your debt-to-income ratio will be lower.

The option to work remotely gives people more flexibility to be away from their main home for longer stretches of time. With that in mind, high-quality Wi-Fi and home office space in your second home could help attract these long-term renters.

Have a plan for extra expenses

Purchasing a second home earlier than retirement can have its advantages, such as being able to spread the cost over a longer period of time during your earning years and being able to enjoy your second home before you retire.

But Hill cautions that there can be a downside to purchasing a home now that you intend to use personally only later. “The longer you own a property, the greater the associated expenses will be,” she says. “It’s just going to cost more to own the property, so even if you buy it earlier to spread the cost out over the years, the overall cost itself will add up over time.” Those costs typically include expenses related to maintenance and repair, taxes, insurance, and, in some cases, homeowners’ association dues. And, during times of rising interest rates and higher inflation, these costs are likely to increase.

Renting a home to others also means you’re responsible for additional costs, such as paying for emergency repairs, like a broken hot water heater or plumbing problems that renters encounter. You may also choose to hire a rental management company to handle reservations and repairs because you don’t have the time to tend to those matters yourself.

Key questions to ask before you buy

Hill says that your answers to these three important questions can help you decide if now is the time for you to consider buying a second home.

  1. Do you need the second home now, or do you need it later? This question refers to your planned use. In many cases, you may be happier with a second home purchase if you’re able to make use of it on a regular basis in the years before you retire.
  2. Can you cover additional expenses while managing other financial priorities? “A second home can be an expensive asset to invest in,” Hill says. “So, you’ve got to balance your ability to finance it and pay for it with any cash flow needs you may have.” It’s important to remember that a second home is not a liquid asset. That means you’ll want to consider having access to investments that can easily be converted to cash in case you need ready access to funds.
  3. What does the housing market look like now? A lot of factors play into this assessment, including housing market prices, interest rates, and housing inventory. If you’re hoping to rent your second home as a vacation property, whether it would attract renters in the long term should be considered.  “What’s the vacation rental market in the area?” Hill asks. “Is there a town or a city nearby that offers shopping, dining, or entertainment? What are the amenities in the home?  How much of the home do you need to finance?”

Consider discussing further with legal, tax, and financial advisors

Because the purchase of a second home could have implications on your current finances, estate plans, and retirement goals, Hill suggests you consult with an attorney, a tax advisor, and a financial advisor. They may help you determine how purchasing a second home and any related costs might fit with your investment goals and plans.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.

Wells Fargo Advisors and its affiliates do not provide legal or tax advice. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.

This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.