The number of people looking for a second home is still 77% above pre-pandemic levels. Find out why here.
In Redfin’s analysis of mortgage-lock data, they found that demand for second homes fell slightly to 77% above pre-pandemic levels. They attribute this to affluent home buyers taking advantage of remote work as well as the record-low mortgage rates.
Using the data from real estate analytics firm Optimal Blue, Redfin created an index that adjusts for typical seasonal patterns. This adjustment also allows for simple comparisons for second home demand during and before the pandemic.
“Pre-pandemic” is defined as the months of January and February 2020. These months were set to 100 in the index as the base level. Any month or data point above 100 represents demand that is above pre-pandemic levels. Meanwhile, those below 100 indicate that the demand is below it.
Interest in buying a second home started to rise in the summer of 2020. And the demand peaked at 92% above pre-pandemic levels in January 2021. During this period, Americans were getting vaccinated and thus felt safer to go on vacation.
Meanwhile, the slight slowdown in November and December 2021 is more likely due to the holiday season, which has always been a slow period for home sales. This did not indicate that the demand is getting lower.
According to Redfin’s Chief Economist Daryl Fairweather:
The wealthy are still flush with cash and have access to cheap debt, which is why second-home purchases remain far above pre-pandemic levels.
What Is a Second Home?
Basically, a second home is a residence that you live in for some of the time. But there are some contexts in which the term needs to be more specifically defined. To better understand what a second home is, let’s also take a look at the two other types of homes:
Primary Residence
A primary residence is a unit where you live most of each year, but its exact definition may also vary depending on whom you ask. The IRS defines it as a home that you own and lived in for at least two of the last five years. It is also usually close to where you work. However, this part does not necessarily apply anymore as remote work becomes more prevalent.
Investment Property
Meanwhile, an investment property is a unit that you own for the primary purpose of renting out. While you can still use it for yourself, this is not the main function of the property.
Meanwhile, a second home is not your primary residence but is primarily not an investment property, either. A residence only qualifies as a second home if you live in it for a small part of the year. Also, you can own more than one “second home”. Some people have several other residences that they live in from time to time. These are all still referred to as second homes as long as you bought them for your own use.
For tax purposes, a property is considered a second home when the owner lives in it for either at least 14 days each year, or 10% of the days that the owner rents it out. The homeowner has to satisfy the greater option.
So if you rent out a property for 180 days of the year and live in it for at least 18 days of that same period, then it is considered a second home. But if you rent it out for 180 days of the year but stay in it for fewer than 18 days, then you will have to categorize it as an investment property in your tax filing.
To start looking for and analyzing the best second homes in your city and neighborhood of choice, click here.
How to Buy Second Home
The process of buying a second home is similar to when you bought your primary residence, except there are some considerations to keep in mind.
Why and Where to Buy a Second Home
When deciding on where to buy your next property, you need to consider why you are buying one in the first place.
Some people buy a second home for them to vacation in. If they live in a cold area, for example, they would want to buy a property in a warmer location where they will stay during the winter. There are also those who would want to have their own lodging in a ski town so they do not have to make a reservation in a hotel.
Others may need a secondary residence because they need to spend time in another city, usually because of their jobs. So instead of renting, they may decide to buy a property there.
It would also make sense to buy a second home that you can both use and invest in. Since a secondary home is usually lived in by the owner for at least 14 days a year, you may think it a waste of money to leave it unused for the remainder of the year. You could then rent it out to earn extra income. Just make sure that you still meet the tax conditions.
Can You Afford to Get a Second Home Loan?
Taking out a second home mortgage is more challenging than when you had to apply for a mortgage on your primary residence. This is because second home mortgage requirements tend to be more strict. For one, many lenders do not offer a second home loan if you plan to rent it out. But you can find a few that would lend to you if you rent out the house for a maximum of 180 days per year.
Second, you might be required to put at least a 10% down payment even if you have a good credit score, when you may have been able to make a down payment as low as 5%. Your second home interest rates may be higher as well. The reason for these stringent conditions is that a second mortgage adds more financial pressure to the home buyer and thus creates additional risk to the lender.
Find a Profitable Second Home With Mashvisor
A second home is a good investment whether you rent it out or not. As long as its location is desirable, you can expect its market value to appreciate in the long term. But if you decide to put it up as a short-term rental when you are not using it, then you may be able to earn three times that of a traditional rent in a month. Of course, you must first make sure that the property you are buying is optimal for such a strategy.
To do this, we recommend using a real estate investment tool like Mashvisor’s Property Finder. You can get access to our real estate investment tools by clicking here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.
