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Demand for Buying Second Homes Has Doubled

by Ademola AdepojuJun 2, 2021January 15, 2024

More people are looking for second homes according to a recent report by Redfin in its analysis of mortgage rate locks.

According to the analysis, the increase in demand for buying second homes is over double the increase in demand for primary homes. As of April 2021, demand has increased by 178% year on year, making it the 11th consecutive month of 80% growth.

While these numbers have to be taken into context, increasing demand for second homes is not necessarily the aftermath of the pandemic. A quick look at rate locks for second homes in January 2020 shows a 51% increase from the year before. It is also an indication of where the market is at right now. Increased demand, low inventory supply, and, therefore, bidding wars for properties are the reality in many cities across the country. People looking to move from one primary home to another are competing with wealthier Americans who have the financial resources to buy second homes.

Why People Are Buying Second Homes

A lot of factors are attributing to this surge in demand for second homes. On top of the list is the Coronavirus pandemic. It basically affected not just the way we work, but also how we live and vacation. So, as a response to this lifestyle shift, many people are looking for alternative abodes that also double as their vacation spaces or summer home since remote work allows employees to work from anywhere.

For families who live in bigger cities, safety and security is a major motivation when it comes to buying second homes. Almost like a lesson learned from situations like the Covid-19 pandemic. So, it’s not unusual to now find families with children looking for a second property in less populated areas.

Apart from this, second homes are turning out to be investment options for people looking for vacation rentals. An alternative means to generate income in a profitable industry like real estate. Second homes are very attractive as income properties because of their lower home loan interest rates and subsidized stamp duty.

What Is a Second Home?

Defining a second home isn’t that straightforward as it often means different things to different people. However, there’s a common theme — second homes are like secondary residences where you don’t reside full-time. But they don’t have to function as investment properties to be considered that, knowing we have three major types of properties — primary residences, second homes, and investment properties.

You can also have more than one ‘second home’. Just in case the ‘second’ in the word was a bit misleading.

So, generally what qualifies a property to be considered a second home depends on what you need it for.

Tax Purposes

You reside in the property for at least 14 days in the year.
You reside in the property for 10% of the time you lease it.

The higher of the two is usually considered for tax deduction purposes.

Primary Residence Capital Gains Tax Exclusion

You didn’t own the house for at least two of the last five years.
You didn’t live there as your main residence in two of the last five years.

Financing

Here, a second home is one that is not your primary residence but is not rented out either.

Second Home vs Investment Property

Here’s everything else we know when it comes to buying second homes, especially in the areas of tax, as that’s one of the major differences between these two types of properties:

Rental income taxation: You can keep all your rental income from renting it out for two weeks or less as the IRS won’t lay any claim to part of the returns. If you’re renting out for more than two weeks, your house will be treated as an investment property, and, therefore, you will have to report your rental income. But you can deduct expenses like rental property maintenance and property ownership. Also, second homes can take advantage of the mortgage interest tax deduction so long they meet the IRS requirements.
Home loans: It’s easier to finance second home mortgage rates as they enjoy lower interest rates than investment property loans. It’s not unusual to find many lending companies to treat vacation homes as second homes.

If you’re thinking of buying second homes, you need to understand all of these definitions so that you can use them properly.

How to Finance a Second Home

While financing requirements when buying second homes are less strict than when buying investment properties, they are stricter when compared to primary residences. It’s important to note this if you’re someone who has previously purchased only a primary home. With this in mind, the best way to finance your second home is through home equity financing.

Home Equity Financing

This is the most widely adopted method of financing for buying second homes and that is because it allows you to access larger cash deposits at lower interest rates. It’s easier to get home equity than the typical mortgage loan, and the lender doesn’t care too much about how the home equity proceeds are spent. What the lender is mainly concerned with is if your income, credit, and primary home can support your loan.

Second home equity financing can be obtained in two ways, including:

Home equity loans: With this, you can get financing against built-up equity on your home. It includes a lump-sum payout and is paid back in equal monthly installments over the lifetime of the loan just like your primary residential mortgage. Also, the interest on the loan does not change throughout the lifetime. As a result, you can access large cash to buy your new home while paying back in reasonable installments.
Home Equity Line of Credit (HELOC): HELOCs operate a somewhat similar model to credit cards. You can draw lines of credit and repay. As an advantage, it offers a good flexible way to finance your investment property down payment.

Home Equity Loans vs HELOC

While HELOCs offer flexibility, you don’t want to draw on an entire line of credit because that drives up your credit utilization ratio and could affect your credit score in a negative way. Also, due to the variable interest rate on HELOCs, you are more open to volatility on monthly repayments. Knowing this, you may want to consider home equity loans instead, especially if the down payment required is more than 30% of the credit line available on your HELOC.

As a tip for buying a second home, when choosing home equity financing, ensure you can meet the monthly payments on the home equity loan as well as any other outstanding installment debts you may have. This is so that you don’t run the risk of losing both your primary home and your second home.

Tax Implications for Buying Second Homes With Home Equity

In terms of mortgage interest, home equity interest is tax-deductible only if it is used to improve the property that it secures, whether it’s a primary home or a vacation home mortgage. This means that if you took a home equity loan on your second home to finance renovations on that property, the interest on the loan will be tax-deductible. It won’t be tax-deductible if you used home equity proceeds from a vacation property to finance the renovation of a primary residence. This is important especially for people who want to know the answer to the question “How many mortgages can you have?”

How to Buy a Vacation Home

Mashvisor’s Property Finder helps you find profitable vacation rentals across the US market

Whether you need the perfect property for your holidays or a short-term rental, buying vacation home rentals is an entire process and you need all the help you can get to make the right decision. Mashvisor is your swiss army knife when it comes to buying second homes and rental properties generally. And here’s how its suite of tools helps you find profitable vacation homes to rent out:

Gather Real Estate Knowledge and Data

If you want to succeed as a real estate investor, you need access to real-time information about the industry. While real estate investing can be very profitable, you need to be able to navigate it properly in order to guarantee positive cash flow and good return on investment. Hence, the need for information hubs like the Mashvisor blog, one of the top real estate blogs and home to over 5,000 articles covering different property investment topics, including vacation rentals.

Whether you are a beginner or have experience in buying second homes, the available well-researched articles based on reliable sources of real estate data will point you in the right direction.

Generally speaking, you want to know all you possibly can about purchasing second homes in the US housing market so that the process is much easier.

Conduct a Thorough Neighborhood Analysis

Now that you know the basics of buying second homes, the real piece of work is in finding the right location for your investment property. People often spend weeks and sometimes months doing research on potential investment locations and wasting precious time in the process. In this case, Mashvisor’s heatmap is the star that leads you to your destination. It provides you with everything there is to know about an area including average values for listing prices, Airbnb rental income, Airbnb occupancy rate, and Airbnb cash on cash return.

These numbers are especially important if you’re thinking about renting out a second home. You can also easily identify neighborhoods with lower home prices and high return on investment. This is because choosing an affordable location with at least above the industry average cash on cash return is the best way to succeed when buying second homes or investment property.

Determine the Rate of Return per Property

Finding the perfect neighborhood is one thing, finding the right property is another. And there’s no better way to achieve this than a thorough investment property analysis. This will help you determine what rate of return to expect on any property in that neighborhood if you decide to offer your house to rent.

Mashvisor’s investment property calculator gives you access to rental comps for short-term rentals like Airbnb in the area. The data for these listings comes directly from Airbnb and so our Airbnb estimator is as trustworthy as it gets.

Work With an Agent

As a beginner buying second homes for the first time, it can be overwhelming. In this case, you can decide to enlist the help of experienced real estate agents to help with negotiations and close the deal faster. For this, you can use Mashvisor’s real estate agent directory to connect with an agent in any US housing market of your choice.

To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.

Best Places for Buying a Vacation Rental Property in 2021

Since buying second homes can also mean buying a vacation rental property for the future, it is important to know the best locations for such investments, namely Airbnb rentals. Based on Airbnb data from Mashvisor, here are some of the most profitable cities for buying an investment property for vacation rentals in 2021:

Mashvisor Infographic: Best Places for Buying a Second Home in 2021

#1. Wakefield, Massachusetts

Median Property Price: $639,950
Price per Square Foot: $306
Monthly Airbnb Rental Income: $6,955
Airbnb Cash on Cash Return: 9.23%
Average Airbnb Daily Rate: $195
Airbnb Occupancy Rate: 66.26%

#2. Beaumont, Texas

Median Property Price: $288,284
Price per Square Foot: $127
Monthly Airbnb Rental Income: $2,525
Airbnb Cash on Cash Return: 8.45%
Average Airbnb Daily Rate: $114
Airbnb Occupancy Rate: 51.39%

#3. Toledo, Ohio

Median Property Price: $108,000
Price per Square Foot: $86
Monthly Airbnb Rental Income: $1,816
Airbnb Cash on Cash Return: 8.08%
Average Airbnb Daily Rate: $106
Airbnb Occupancy Rate: 63.70%

#4. Covington, Georgia

Median Property Price: $288,072
Price per Square Foot: N/A
Monthly Airbnb Rental Income: $3,476
Airbnb Cash on Cash Return: 8.07%
Average Airbnb Daily Rate: $166
Airbnb Occupancy Rate: 63.81%

#5. Levittown, Pennsylvania

Median Property Price: $304,590
Price per Square Foot: $220
Monthly Airbnb Rental Income: $3,569
Airbnb Cash on Cash Return: 8.00%
Average Airbnb Daily Rate: $110
Airbnb Occupancy Rate: 77.50%

#6. Modesto, California

Median Property Price: $443,983
Price per Square Foot: $302
Monthly Airbnb Rental Income: $4,356
Airbnb Cash on Cash Return: 7.89%
Average Airbnb Daily Rate: $111
Airbnb Occupancy Rate: 71.81%

#7. Lansing, Michigan

Median Property Price: $205,337
Price per Square Foot: $115
Monthly Airbnb Rental Income: $2,323
Airbnb Cash on Cash Return: 7.00%
Average Airbnb Daily Rate: $190
Airbnb Occupancy Rate: 79.50%

#8. Loveland, Ohio

Median Property Price: $335,186
Price per Square Foot: $170
Monthly Airbnb Rental Income: $3,019
Airbnb Cash on Cash Return: 7.00%
Average Airbnb Daily Rate: $165
Airbnb Occupancy Rate: 72.00%

#9. Bishop, California

Median Property Price: $561,300
Price per Square Foot: $291
Monthly Airbnb Rental Income: $5,074
Airbnb Cash on Cash Return: 6.94%
Average Airbnb Daily Rate: $187
Airbnb Occupancy Rate: 79.21%

#10. Chesapeake, Virginia

Median Property Price: $330,395
Price per Square Foot: $173
Monthly Airbnb Rental Income: $3,832
Airbnb Cash on Cash Return: 6.82%
Average Airbnb Daily Rate: $165
Airbnb Occupancy Rate: 68.38%

#11. Newburgh, New York

Median Property Price: $413,684
Price per Square Foot: $213
Monthly Airbnb Rental Income: $4,912
Airbnb Cash on Cash Return: 6.80%
Average Airbnb Daily Rate: $217
Airbnb Occupancy Rate: 64.00%

If you ever plan on operating your second house as an Airbnb, it’s important to note that different states and cities in the US have different laws guiding short-term rentals. So, you want to keep this in mind when buying a vacation home.

Also, based on data from Mashvisor, an Airbnb rental strategy has always been the more profitable strategy. If you are already thinking of buying second homes, you are in the right direction.

To start looking for and analyzing the best locations for buying second homes, click here.

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