Not many investments offer you the same combination of personal and financial rewards as buying a vacation home. Although it’s a significant commitment, it can be a long-term investment in your family’s happiness and financial security. And you don’t have to be a real estate tycoon—or particularly rich—to buy a second property.
We aren’t financial advisors, but as the leading vacation rental management company in the US, we are experts in how to make the most of your investment in a second home. This beginners’ guide on how to buy a vacation home includes data-driven insights from specialists across our teams to help you make the smartest investment.
Buying a vacation home allows you to build wealth, plan for retirement, and—of course—vacation. Knowing which benefit is most important to you, and how you’ll weigh each factor, will help you choose the right home to meet your goals.
If you’re considering buying a second home primarily to host your own vacations, you aren’t alone—nearly half of vacation home buyers surveyed in 2017 intended to use their property for personal use or family trips.
However, it’s still worth understanding what makes specific properties attractive to paying guests. Changes in your own life or beyond your control (like the housing market or tax code) may put you in the position of renting down the line.
For example, Vacasa was founded during the Great Recession in 2009, and many of our early homeowners signed on due to those economic changes. Another wave of homeowners are currently considering renting out their properties for the first time, thanks to the 2018 tax code update that introduced a new cap on mortgage interest deductions (more on that in a minute).
Your second home can always be your own private getaway, but taking its future earning potential into consideration now could end up paying off in the long run.
Real estate is an appealing investment because you don’t need to put down the whole value upfront. And when you buy a vacation property, with the full intent of renting it out to guests, you can help offset the cost of the additional mortgage, property taxes, and ongoing cost of maintaining a second home—while likely providing a long-term return.
Your parents were right—it’s never too early to plan for retirement. And while you’re building up your 401(k), why not consider purchasing the home you’ll retire to someday?
Retirement may be a few years (or decades) off, but consider this: In your 40s and 50s, it’s easier to get approved for a mortgage since you’re still employed, making your debt-to-income ratio (DTI) fairly low. It’ll be easier to enter retirement debt-free if you buy your second home early (especially if you rent it out). And, if you use the home to generate income, you’ll enjoy a bit of extra cash flow that could be funneled towards an emergency fund, your IRA, or a child’s college fund.
Once you have a clear understanding of why to buy a vacation home, the next step is understanding the cost—whether you can afford it.
Budgeting for a vacation home is different than your primary residence, in part because mortgage lenders and the IRS will treat your purchase differently based on whether they categorize it as a second home or an investment property.
Mortgage lenders and the IRS look at different factors to categorize your home (and may define them differently), but generally speaking, an investment property is rented out to generate additional income while a second home is for your own personal use. Taking out a mortgage may be easier for a second home than an investment property, but there are trade-offs when it comes to how you file your taxes.
This can get a little complicated, so bear with us. (And our lawyers would like us to clarify that we aren’t financial advisors or accountants, so please consult the licensed experts after reading our general overview.)
Unless you’re intending to buy your vacation home with cash, you’ll need to apply for a mortgage. Lenders are more particular about approving a second home mortgage because they’re usually considered subordinate to your primary home mortgage—meaning you’ll have to pay the first one back before the second if you default on the loans and go into foreclosure.
Keep in mind that both investment properties and second homes are ineligible for government loans (like an FHA, USDA, and VA loans).
Investment properties usually require more stringent qualifications, higher down payments, and higher interest rates than second homes. This is because investment properties are considered higher-risk—if you run into financial trouble, you’re more likely to walk away from a home you don’t live in than one you do.
Second homes usually receive better interest rates and require lower down payments than investment properties, but being dishonest about your intentions is considered occupancy fraud.
Lenders typically require that a second home is at least 50 miles away from your primary residence, while a property less than 50 miles away is considered an investment property—because you aren’t likely to vacation in a home so close to where you live full-time.
Like mortgages, tax rules will be a little different for a second home, especially if the home is an investment property. If you’re planning to buy a vacation home, it’s a good idea to find a financial consultant who can help you get the most out of your rental income.
The IRS makes specific distinctions between an investment property and a vacation rental property:
Investment property income can be taxed differently than vacation rental income, since expenses for an investment property are considered business costs rather than personal spending.
There is also a special rule for the inverse, known as Minimal Rental Use: If you only rent your second home out 14 days per year, then you don’t need to claim the rental income or get to deduct any “rental expenses”. Otherwise, you'll need to claim income from your vacation rental.
When you’re preparing your taxes for your vacation rental, you’ll need to divvy up the expenses between rental use and personal use. And you may be limited on which deductions you can take, such as property taxes, mortgage interest, and Realtors’ fees.
The Tax Cuts and Jobs Act changed the landscape of taxes for second home owners and how they can take deductions. Specifically:
If your second home is designated as a vacation home, the best way to maximize your deductions (not to mention your income) is to rent your home out as much as possible. If you only use the home two weeks a year (not counting days you spend improving the property), then the income you generate is still considered taxable.
If you rent out your second home, you’ll need a policy that covers vacation rental use of your home instead of regular homeowners insurance. Always discuss your options with a professional insurance provider so that you are adequately covered and can find the best policy for you.
Let’s say you have friends over for a barbecue. One of them is leaning against the porch railing when it suddenly comes loose, causing them to fall off the porch and injure themselves. Your homeowners insurance would likely cover any medical expenses and potentially any legal expenses.
Classic homeowners insurance covers:
Because a vacation rental is considered a “business” (your guests are paying you to use your home), anything that occurs during a guest’s stay would be considered commercial activity. So if a similar scenario played out at your vacation home, you’d be held liable as a business owner and would require a different policy.
Insurance that covers vacation rental activity will often be an additional cost (and may have to come from a different insurance provider). We’ve partnered with Assurant to provide comprehensive yet affordable protection for Vacasa homeowners. Assurant’s coverage includes:
In addition, special natural disaster insurance may be necessary for homes in flood, tsunami, or hurricane paths, or for homes in areas susceptible to earthquakes.
Depending on where you buy your vacation home, the area may require specific permits in order for your vacation home to be considered legal. A good vacation rental management company may help you navigate the legalization process. Otherwise, you should speak with the local county or city officials to learn what is necessary.
Check to see if you need any of the following in order to operate a vacation rental:
These may also require specific fees (usually paid annually), such as:
When you’re shopping for a vacation home, consider how location and key amenities will impact its appeal to your future guests—and how much you’ll earn. For example, there’s a significant difference between how much you can charge for an oceanfront home compared to just one a few blocks away. And if you buy a home where it’s impossible to install a hot tub, you might undercut your earning potential before you even start renting.
Here’s what we recommend you keep in mind:
Dog-friendly: It pays to allow four-legged guests—we see an average of $6,500 in increased revenue for dog-friendly rentals. While shopping for your second home, ask about any HOA or community pet policies. And remember that special touches like a fenced yard could make your home especially appealing to travelers with pets.
Hot tub: When our owners ask how they can earn more income, our first recommendation is to add a hot tub—we'll even help finance and install them for most Vacasa homes. Guests search for hot tubs more than any other amenity, other than pets. (This applies in most markets, but if you buy a second home in an area with year-round warm weather, a hot tub won’t pack the same punch!)
Internet: Modern travelers expect Internet access, even in remote mountain cabins, and we recommend providing it whenever possible. If you're buying a secluded getaway, remember to ask about connectivity.
Other popular perks include swimming pools (private and community), fireplaces, and washer/dryers, so if you're looking to earn the most possible rental income, add those amenities to your wish list.
If you do choose to rent out your second home as a vacation rental, there are a few different ways you can choose to take care of it (and your guests).
If you have a flexible schedule, enjoy doing handy work, and live fairly close to your property, then self-management may work out for you. Keep in mind, however, that while it may seem like you can save some money if you take care of everything yourself, there’s a considerable expense in time, energy, and late-night phone calls when a guest can’t figure out how to connect to the WiFi.
Here’s what you’ll be responsible for when you’re self-managing your vacation home:
There are some companies who provide an option between full-service vacation rental management and self-management. They will usually take care of advertising your home, processing payments, and potentially answering online inquiries.
However, the on-the-ground tasks like housekeeping, maintenance, and most guest support will still fall to you (or contractors you hire and manage on your own).
If you live far away from your second home, or don’t have the time to worry about all the details, then a full-service vacation rental management company like ours is your best bet. We’ll take care of all the details for one comprehensive fee—everything from marketing to maintenance to on-the-ground guest support—without you needing to lift a finger.
When you’re ready to purchase a second home, we’re here for you from start to finish.
We have a network of preferred real estate agents who specialize in vacation rentals. They can help identify homes that will deliver above-average financial performance, and work with our local representatives to navigate the local regulations and taxes you’ll need to consider before you buy.
When you’ve chosen your perfect vacation home, our interior design team can take care of furnishing your rental to make it exceptionally appealing to future guests. And our local team will take care of all the permitting, photography, and other details you need to get your new home set up as a successful rental.
Of course, you’ll still be able to enjoy your own vacations whenever you want—we don’t put any limits on how you use your home, and we don’t lock you into any long-term contracts. And when you come to visit, our local team will have your home sparkling clean and ready for your own vacation.
Note: In some states, Vacasa operates through a licensed subsidiary that may offer additional real estate-related services.