Winter is in the rearview mirror and spring is in full swing. As you dream about your favorite beach, lake or mountain trail, you might think, “That was such a great place to visit. What if we lived there?”
Retirees initially became more interested in second homes amid the COVID-19 pandemic, said Ian Katz, a real estate agent in New York City. “The pandemic brought people closer. They want exposure to multiple climates while keeping in touch with family.”
In the years since 2020, second home purchases have cooled significantly, amid the rise in mortgage interest rates. However, high mortgage rates are not necessarily a deal breaker for retirees and near-retirees thinking of buying second homes, Katz noted, as people in those groups are less likely to need large, long-term loans since many use their savings to buy a new property.
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“Soaring prices pushed down demand for vacation homes last year, both for cash buyers and those getting a mortgage — but the latter pulled back even more because high rates exacerbated high prices,” said Phoenix Redfin Premier agent Heather Mahmood-Corley. “
If you’re considering a second home, think carefully before making this major purchase — there's more to consider than just where is the best place to buy a vacation home. The wrong property can turn your dream into a nightmare.
Here’s what you need to know about buying a vacation home in retirement:
1. Prices on homes are near all-time highs
Even amid the overall real estate slump, homes in desirable vacation spots are still pricey. “Many towns now have full-time remote workers competing with retirees,” warns Katz.
It’s more expensive to buy a second home. The typical second home was worth $475,000 in 2023, versus $375,000 for primary homes. Additionally, the federal government increased loan fees for second homes in 2022, upping the total cost of buying one. And demand for second homes hasn’t picked up in 2024, according to a Redfin study.
Be conservative about budgeting. Make sure you can keep up with your spending, including ongoing costs for the new home, even after a possible drop in income.
This significant commitment could restrict your ability to travel elsewhere, said Mark Charnet, a financial adviser in Pompton, N.J. “You’re tied to the same place. Unless you love the idea of having your own home and bed in each location, it might not be a good idea.” Maybe a hotel or renting homes through AirBnb or Vrbo is a better option for you.
2. Borrowing is more challenging
If you’d like to finance your purchase, mortgage rates are typically 0.5% to 0.75% percentage points higher for a second home versus a primary home. And if you do have to borrow, mortgage rates are starting to come down after reaching a 21-year high.
In 2023, homebuyers took out 90,772 mortgages for second homes, down 40% from a year earlier and down 65% from the height of the pandemic housing boom in 2021. The share of total mortgages that went to second-home buyers also dropped last year: 2.8% of all mortgage originations in 2023 were for second homes, down from 3.6% in 2022 and 5.1% in 2021, according to the Redfin study.
You should also expect to make a down payment of at least 10% on a conventional mortgage for a second home, though a larger down payment could give you a better chance of qualifying for a lower interest rate, said Katz.
3. A test drive leads to a smarter purchase
Katz has seen retirees rush second home purchases without genuinely understanding the area they’re buying in, which can lead to regrets. “Get a hotel or Airbnb for an extended stay first,” he said. “Sample the daily vibe.”
Consider how a property would meet your long-term retirement needs. “Even if you run marathons today, that might not be the case 20 years from now,” said Katz.
Think of how you’d manage around a property with less mobility. How many steps are needed to get inside from your car? Is the bedroom on the ground floor? Katz says to check whether the local homeowners association would let you make mobility upgrades like a wheelchair ramp.
4. Upkeep and maintenance add up
Charnet finds that people underestimate how much they’ll owe in annual upkeep and maintenance on a second property. “They budget for the mortgage and the taxes, but that’s just scratching the surface,” he said. “Any given year, the windows might need to be replaced, the roof could leak or the water heater could break.”
Depending on the age of the house, maintenance expenses may shock you. A newer place may require only 1% to 4% of the home value for maintenance and emergency repairs, but an older place can cost much more. Charnet, who owns 25 rental properties, sets aside 7% a year for maintenance and emergency repairs. On a $300,000 property, that would be $21,000 a year.
5. Property taxes can be a nasty surprise
States such as Florida, Nevada and Texas don’t have income taxes, but they can really stick it to you with property taxes. Katz, the real estate agent from New York City, said to check how the property tax bill will be assessed after you buy. Some localities readjust based on the new selling price.
“Let’s say you buy a place in Delray Beach, Fla., from someone who bought it 20 years ago,” he explained. “That old price will anchor their property tax. When you take over, the taxes will end up much higher than what it currently says on Zillow.”
6. State income taxes depend on the 183-day rule
Buying your second home in another low- or no-income tax state could be a way to lower your overall tax bill. But it depends on how long you live in your second home.
New York and many other state governments follow something called the 183-day rule. Florida is a popular second-home location for people from high-tax New York, but if you spend more than 183 days in New York during the year, it counts you as a resident for taxes.
7. Renting is possible, but not always easy
As you move between locations, you could potentially rent out your unused properties to generate extra income. Tim Touchette, owner of Attache Corporate Housing in Washington D.C., runs these arrangements for retirees but said short-term renting can be challenging, as leases are typically a year or longer. “If you’re away for six months, the problem is you need to find a renter looking to stay exactly six months.” Or it could mean juggling multiple renters throughout the year.
Renting means overseeing the property yourself as a part-time landlord or paying out-of-pocket for a property manager, which costs about 8% to 12% of the monthly rent. Touchette said people typically expect to have furnished properties for short-term rentals. You might not love the idea of others using your bed, couch, and other belongings.
Before buying a condo, check whether the building has rules and restrictions limiting your ability to rent.
8. Tax breaks depend on usage
You can deduct the home mortgage interest and property taxes for a second home against your personal income, the same as you do with your primary residence. To qualify for these homeowner tax breaks, you must live in the property at least 14 days a year or 10% of the days you rent it out, whichever is greater.
You can earn tax-free rental income legally if you rent out a second home for up to 14 days per year. If you rent for longer, you’ll owe income tax on the rental income, but you’ll qualify for more tax breaks, such as the cost of repairs to the property, maintenance, insurance and hiring a property manager.
When you sell your second home for a profit, you owe taxes on your entire gain. There isn’t an exclusion like for selling your primary residence. As long as you own the home for at least one year, you owe long-term capital gains which is much lower than the income tax rate.
9. Insurance and an LLC protect your investment
You will need a homeowner’s insurance policy on your secondary home. Charnet, the financial advisor from New Jersey, said your existing carrier may allow you to expand your current policy to cover a second home, but he suggests getting quotes from local insurers in the new area. “It could be less expensive to buy from an agency that understands the other market versus your current carrier.”
If you plan on renting out your second home, Charnet suggested setting up a limited liability corporation (LLC) to own the property. “When you own both properties outright, and someone sues for an injury, they could also come after your primary residence and savings. If an LLC owns the second home, the most they can get is the value of the second home.”
10. Inherited properties aren’t always welcome
Vacation homes are a top asset for inheritance fights, especially if some heirs want to keep the property and others want to sell.
“If you have three kids, are they all interested in that vacation home?” asked Charnet. “If not, you could split your estate so the ones who aren’t interested receive more cash, investments, or life insurance payouts.”
Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
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