Updated March 3, 2024
Wouldn’t it be great to own a second home? You know, a sunny winter retreat in a desert resort town, or a mountain chalet for ski season? You’re not alone.
According to the National Association of Home Builders (NAHB) estimates, there were 7.15 million second homes in the U.S. in 2020, the last year estimates were calculated. That was 5.11% of the total housing stock in 20201.
While owning a second or vacation home is a wonderful benefit for many, it’s an investment that shouldn’t be entered into lightly. Potential buyers need to arm themselves with knowledge of the pros and cons, which include financing, upkeep and repairs, homeowner’s insurance, tax planning, and many other factors.
Gregg Neuman, a Luxury Specialist in our San Diego Downtown office, has almost four decades of experience working with second-home owners. He knows the ins and outs of the category, primarily with clients throughout Southern California’s coastal communities. We talked to Gregg about what’s key to know before getting the key to a second home.
First, it’s important to set the stage by discussing the overall financial landscape of second home ownership. This can be complex to navigate, as it includes considerations such as home loans, interest rates, capital gains, and a second mortgage.
When we spoke with Gregg Neuman, one of the first things Gregg brings up is an owner’s ability to deduct state and local taxes (SALT) on a second home. This has historically been a valuable tax break for taxpayers who itemize deductions on their federal income tax returns. But the Tax Cuts and Jobs Act of 2017 limits SALT deductions for 2018 through 2025.
These changes unfavorably affect individuals who pay high property taxes if, among other situations, they own both a primary residence and one or more vacation homes, which results in higher property tax bills due to owning several properties. People in these categories can now deduct a maximum $10,000 of personal state and local property taxes–even if they deduct nothing for personal state and local income taxes or general sales taxes.
“What the SALT change has done is made vacation homes, particularly in areas like downtown San Diego, less affordable because you no longer have the ability to deduct for that investment,” Gregg says. “We had ‘snowbirds’ who came here when winter got cold in the north. We had people from Arizona and Nevada and Texas, when it got hot there, coming here to enjoy our better climate. So, with that SALT change impacting our market, there are fewer of those buyers now because many people don’t want to buy without the tax deduction that made the purchase of a second home a good investment. It’s really hammered the states that have high income taxes and high property taxes.”
Despite that tax change, how would you go about buying a second home if you really wanted to? If you have a 20% to 25% down payment, a number of lenders would be willing to work with you, Gregg says: “It’s a pretty standard mortgage for a non-owner-occupied home or a second home. The lenders feel pretty secure that you’ll make the payments. They still have to appraise the property, and you get a slightly higher interest rate than you would get on an owner-occupied home–maybe a half-percent or quarter-percent higher.”
As you’re considering the purchase of a second home, clarity in your purpose is helpful to guide you through the process. Is it intended for personal use as a vacation home, or is the primary goal investment-oriented, focusing on rental income and potential capital gains? In California’s real estate landscape where second homes are very common, this distinction holds significance and will help serve as a guide through your process.
For those primarily seeking a vacation home, considerations like proximity to desired amenities, lifestyle preferences, and long-term enjoyment become important. On the other hand, if the goal is investment, factors such as local rental restrictions, potential rental income, and property appreciation take precedence. Berkshire Hathaway HomeServices California Properties advises potential buyers to articulate their goals clearly, aligning the property purchase with individual preferences and financial objectives.
With this question, there are several things to consider. A lot depends on the location of the second home, because there can be local rental restrictions. In Gregg’s area of expertise, downtown San Diego, most homes are in high- and low-rise condominiums. “In that area, most of the buildings have restrictions on length of rental times,” Gregg notes. “There are a few buildings that have 30 days or less, but most have six months to a year minimum rentals. So it becomes a little more challenging to have your house rented for six or eight months and then you move in and enjoy it for two or three months. It’s possible, but less likely. And that’s mainly the building’s intent, to protect the building itself by having it not a turn into an Airbnb or a hotel room, but a building where people live in it and typically take better care of the facilities and are better neighbors.”
If you’re buying a condominium, yes, because it’s required in your homeowners association dues. Some people struggle with that, Gregg says, because they don’t like paying monthly HOA dues, even though they cover common-area items such as roof leaks or sprinkler repairs. “If you buy a single-family home, you may live in it for 20 years and never have to replace the roof, so you’ll never have that expenditure,” he points out. “If you’re smart, you would put some money aside for maintenance to take care of it. If you’re in a condominium, it’s done, period. The only thing you maintain is the interior things like paint and carpet, like any rental would be.” And just like your primary residence, homeowner’s, earthquake, and other insurance should be factored into the costs of owning a second home.
Gregg suggests renting a place at different times of the year to get an idea of the area: “Ask yourself, ‘Would I like to live here full time? Is there enough to engage me in this region?’ If there is, you need to start looking at the neighborhoods, and making sure that you’re getting into one that’s going to retain its value.” You can do this by working with an experienced real estate agent who is familiar with the area. Ask to see purchase and sale prices of comparable homes nearby (comps). Talk to the neighbors. Visit day and night. See how long it takes to reach shopping, entertainment, and medical facilities. Go through all the same procedures you would in buying your primary residence.
Gregg has some advice that a potential buyer might not want to hear: “Having been in the business for almost 40 years, one of the most interesting things I have found is that most people who buy a second home regret the decision after four or five years. And the reason is that every time they can take a vacation, they feel like they have to go there. They think, ‘Well, it would be nice to go to Europe, but we bought this house in San Diego so we better go there.’ So do your homework before you get that second home.”
There are a lot of factors to weigh when considering buying a second home, from financial details to location preferences to planning for your long-term future. With the support of California REALTORⓇs specializing in buying second homes, you can navigate these factors and make a decision more confidently.
Real estate agents understand the local market dynamics, rental regulations, and potential challenges associated with second home ownership. Berkshire Hathaway HomeServices California Properties emphasizes the importance of collaborating with a team of experts to ensure a seamless and informed buying process.
Still have questions about buying a second home, vacation home, or rental home? Just reach out to any one of our qualified real estate agents in an office near you.
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March 3rd, 2024 at 11:00 am