Is a second home a good investment or just another potential burden when markets fall? Is there genuine advice on second homes that is meaningful and can help you come to a decision? Second homes may or may not be the investment vehicle you are looking for, depending on your needs.
Yes, you can earn money from your second home, particularly if it is in a high demand location. However, with second homes, you will likely be able to make more money by investing in other forms of investment, such as mortgage backed securities or even purchasing property to rent.
There is no reason not to purchase a second home for your retirement or vacation that you genuinely use as a home from home, but there are better options if your primary goal is to invest your money. Additionally, the real estate market is still a bit volatile in many states to be regarded as secure investment potential. Here are just two reasons why not:
No Income and Loss of Investment Potential
When you purchase a second home with cash, you will lose the investment potential of that cash. If you take a mortgage and so pay interest on it, that is even worse. You are getting no money in, but are paying cash out at a regular monthly rate! Either way, it is sheer speculation that the property will increase in value sufficient to provide you with a long term gain greater than from regular methods of investment.
If you assume that you make even the low estimate of 4% per annum on your capital outlay, a $150,000 second home will cost you $500 in interest alone if you borrowed over 10 years. So the appreciation over a 10-year period would have to be $60,000 just to break even! That is a big ask these days.
Then you have maintenance bills. Homes deteriorate over time and need looking after. You can add these costs to the loss of income from your investment, and all that has to be recovered at a later date taking inflation into consideration.
Second Home: The Long Term View
Let’s assume you pay cash for your second home – there is no other way for an investment. You are unlikely to finish positive in comparison to the investment potential of the capital sum paid for the property.
Your $150,000 property would likely just break even if it appreciated by around 8% each year – but the average tends to be under 5% over longer time periods. However, it is possible, particularly if you let it out and use your rental income in your calculations. If you do that, of course, it is not a ‘second home’ but rental property.
Is a second home a good investment? Most advice on second homes says likely not. However, if you rent it out, even if just as a vacation home on a temporary basis, you have a good chance of doing better than break even. Is that what you really expect of a good investment? That, after all, is the question! If your primary motivation for purchasing a second home is to use the home as just that, a second home, you’re on the right track. If, however, you are looking at making your money work the hardest for you in terms of an investment, there are better avenues to look into such as rental properties, that will also be brining in income.