Second Homes and Vacation Rentals: What to Know Before You Buy
Buying a second home or vacation rental is a dream for many — whether it’s a cozy cabin in the mountains, a beachside bungalow or a stylish city condo that generates short-term rental income. But this type of real estate investment comes with unique considerations. Before you make the leap, it’s important to understand the financial, legal and practical implications.
This guide walks you through everything you need to know, from financing challenges to zoning restrictions to profitability potential, so you can make an informed decision that aligns with your goals.
Understanding the Difference: Second Home vs. Investment Property
While people often use the terms interchangeably, second homes and investment properties are treated differently by lenders, insurers and the IRS.
Second Home: Typically used for personal vacations or seasonal visits. You plan to live there for part of the year but not rent it out extensively.
Investment Property: Purchased primarily to generate rental income, either as a long-term lease or a short-term vacation rental.
This distinction affects everything from your interest rates to tax deductions - so it’s crucial to be clear about your intent from the beginning.
Financing a Second Home or Vacation Rental
Buying a second home isn’t the same as buying a primary residence. Lenders view these properties as riskier, which means:
Higher Interest Rates: Expect slightly higher mortgage rates compared to a primary home.
Larger Down Payments: Most lenders require at least 10% down for second homes and 15-25% for investment properties.
Stricter Debt-to-Income Ratios: You’ll need strong credit, consistent income and lower debt obligations.
If you plan to use rental income to qualify for the loan, some lenders may accept projected income based on market comps or rental history — but others may not. It's best to work with a mortgage advisor experienced in second home and investment financing.
Know the Local Laws and Regulations
Every market has its own rules when it comes to second homes and vacation rentals. Before purchasing, you must research:
Zoning Laws: Some areas restrict short-term rentals (like Airbnb or Vrbo). Others may limit the number of nights per year or require special permits.
HOA Rules: If your home is part of a community with a homeowners’ association, check if rentals are allowed and whether there are usage restrictions.
Local Tax Codes: You may need to collect occupancy taxes or register as a business with the city. Some cities also charge hefty fines for illegal rentals.
Ignoring these details can lead to penalties, forced shutdowns of your rental or future resale difficulties.
Rental Income Potential (and Limitations)
One of the biggest perks of owning a second home is the opportunity to generate passive income. But profitability depends on:
Location: High-demand vacation areas often command premium nightly rates but also come with more competition and seasonal swings.
Property Type and Amenities: Homes with ocean views, hot tubs, or walkability tend to attract more bookings.
Management Costs: If you’re not local, you’ll likely need to hire a property manager, which typically costs 10–30% of gross rent.
Seasonality: Many vacation markets experience significant highs and lows throughout the year. Make sure to budget for off-season periods with little to no income.
A smart strategy is to run a cash flow analysis using conservative estimates — factoring in vacancy rates, maintenance, insurance, taxes, utilities and platform fees — to determine whether the property is truly a good investment.
Insurance, Maintenance and Other Ownership Costs
Second homes and vacation rentals come with unique upkeep considerations:
Insurance: You’ll need a second-home policy or landlord policy, depending on your usage. Vacation rental insurance typically costs more than standard homeowners insurance.
Maintenance: Properties in harsh climates or rural locations may require more frequent repairs. Budget for snow removal, pest control, HVAC maintenance and emergency issues.
Furnishings and Upgrades: If you plan to rent it out, your home must be fully furnished and stocked with essentials. That upfront investment can add up quickly.
Also, remember you’ll still be on the hook for property taxes, utilities and HOA dues — even when the property sits empty.
Tax Implications to Consider
The IRS treats second homes and rental properties differently. The tax strategy depends on how much you personally use the home vs. how much you rent it out.
Personal Use Thresholds: If you use the home for more than 14 days (or 10% of the total days it’s rented), it’s classified as a personal residence.
Deductibility: You can typically deduct mortgage interest and property taxes on a second home, but rental income and expenses must be reported if you rent it out for more than 14 days a year.
Depreciation and Write-Offs: For investment properties, you may be able to depreciate the structure and deduct costs like repairs, insurance and management fees.
Always consult a tax professional before purchasing, especially if your goals include income generation or long-term wealth building.
Exit Strategy and Resale Potential
Before you buy, consider your long-term plans. Will you eventually retire there? Pass it on to family? Sell it in five years? The answer should shape your purchase.
Vacation homes in popular destinations generally hold their value well, especially if they’re well maintained and in desirable locations. Still, market trends, tourism shifts and changes in local regulations can impact appreciation and rental demand — so keep resale in mind when choosing a property.
Buying a second home or vacation rental can be incredibly rewarding — financially and personally — but it’s not a decision to rush. From financing hurdles and zoning laws to income potential and upkeep costs, there’s a lot to evaluate before taking the plunge.
The key is to approach it like an investor, even if your goal is partly lifestyle-driven. Do the research, run the numbers, and build a team of local professionals (lenders, agents, tax advisors and property managers) who can help you avoid missteps and maximize returns.
Whether you’re looking for a quiet weekend retreat or a cash-flowing Airbnb, making an informed purchase today sets you up for a successful tomorrow.