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Pros and Cons of Owning a Second Home in Retirement

The rental income and tax breaks can be nice, but real estate investing comes with risks

couple standing on porch of a log cabin home looking at mountain scenery

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With some companies continuing to allow working from home, you may be envisioning yourself tapping away at your laptop from a second home.

If so, you're not alone. In fact, according to real estate brokerage firm Redfin, the second home market experienced 128 percent year-over-year growth between March 2020 and March 2021.

But the benefits of having a second home can go well beyond giving yourself a change of scenery. It can also be a sound retirement strategy. A survey by investment property wealth manager Realized found that 86 percent of those who currently own one or more investment properties were confident in real estate's ability to provide them with a steady income once they retire.

However, a retirement strategy tied to real estate doesn't come without risks. Here's how to determine if the risk is worth the potential reward.

Assessing the pros and cons

Before you sink your cash into a second home, you need to ask yourself, how does a second home or an investment property fit into what you're trying to accomplish with your retirement, says Shelly-Ann Eweka, senior director of Financial Planning Strategy at investment firm TIAA.

Some investors look to investing in real estate as a way to diversify their assets to counter some of the volatility in the stock market, says Rob Johnson, head of Wealth Management at Realized. “Managing real estate has become much more of a common component of someone's longer-term retirement plan,” says Johnson.

A second property can also provide options for accessing cash in an emergency, such as for medical expenses. If you tap the equity through a home equity loan or a line of credit through your bank, you're doing it not in your primary residence, but in the investment property, Johnson points out.

For those who are thinking about leaving a legacy, an investment property is “something that you could pass down to your kids,” says Michael Steven, author of Build a Successful Retirement Plan Using Real Estate.

But then there are the potential downsides. If you're thinking about renting the second home out as a source of income once you retire, make sure you understand that you can't count on it like you would an annuity or pension, says Eweka, “There will be times that the property is vacant.” If there's a mortgage, you'll have to pay it yourself during those times. While that might not be a problem while you're working, think about 10 or 15 years from now when you retire. “When you stop working, can you afford to pay all the maintenance, the mortgage and the property taxes without having income coming in?” Eweka says.

Then there are the costs. Not only is there the expense of acquiring the home, but you may have to pay for maintenance and repairs, marketing expenses to attract renters and home owners association fees.

Managing the property can also create a whole new world of challenges. You may not have signed up for finding tenants, running background checks and performing all of the duties that being a landlord requires. You can hire a management company to take care of that, but you have to factor in the expense, which can cost as much as 10 percent of the rental fees, says Steven.

You also can't time a down real estate market. If you need to sell, “it's not guaranteed that the value is going to be higher than what you paid for it,” Eweka says.

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Crafting a real estate investment strategy

If you do decide a second home should be part of your long-term plan, make sure you understand what you're signing up for.

There are differences between buying a second home and buying a primary home. A second home is likely to come with higher interest rates than a primary home because it's a riskier investment. If the homeowner runs into financial challenges, he or she is more likely to let the second home go into foreclosure than their primary residence.

Also, expect to make a larger down payment, says Steven, who recommends being prepared to put down at least 20 to 25 percent.

There are also financing and tax implications on whether you plan to use the home as a vacation property for your family or strictly an investment property.

If you use it as a home away from home, you can deduct mortgage interest and property taxes like you would your primary home. However, if you rent the house out for more than 14 days a year, you must report and pay taxes on all rental income. If you rent the house out for 14 days or fewer a year, such as on Airbnb or Vrbo, you don't have to report the rental income.

When financing an investment home, a lender may count anticipated rental income toward proof that you can afford the mortgage.

Whether you buy a second home for pleasure or investment purposes, there are steps you can take to ensure you are making the best move for retirement purposes.

  • Know your financial limitations. “Real estate is not an inexpensive investment,” says Johnson.
  • Think about the annual budget you'll need for upkeep and make sure you can afford it.
  • Do your research. If you're counting on rental income to help fund your retirement, think about the community you plan to buy in and whether renters will want to live there, says Eweka. The industries in that location, the crime rate and the school system can all influence whether it will be easy or difficult to attract tenants.
  • Consider alternatives. If you want to add real estate to your retirement portfolio, you don't have to do it by buying investment properties. You can invest in a real estate investment mutual fund instead, Eweka points out.

The decision to buy a second home should not be made in a vacuum, but rather in relationship to your entire retirement strategy. “We encourage individuals in their fifties and sixties, especially while they're still incredibly active, to think about an investment property as a good component to their portfolio,” says Johnson.

Tamara E. Holmes is a Washington, DC-based writer and editor. She has written extensively about money, entrepreneurship and careers for more than two decades. Her work has appeared in such publications as USA Today, Working Mother and Essence.