AFTER A SURGE IN DEMAND FOR SECOND HOMES during the pandemic, the market for the perfect vacation home or investment property has cooled off considerably, due in part to rising mortgage rates, high housing prices and remote workers going back to the office.¹ Yet the allure of the second home remains a part of the American psyche — and for some, a major source of income, with renters making up more than a third of U.S. households.²

Buying a second home is not a one-size-fits-all proposition. While some may see a second home as a vacation getaway, others may see it as a way to test-drive a retirement location or diversify their assets in retirement. Whether you rent it out or keep it solely for personal use “impacts everything from affordability to the choice of property,” says Kathryn Thompson, a Merrill Financial Advisor in Albuquerque, New Mexico.

For example, a getaway to a remote lake can be wonderful — but you might get tired of making the lengthy trek, says Craig Venezia, author of the bestselling book Buying a Second Home: Income, Getaway or Retirement. “Unless you’re retired or can work remotely forever, consider a property that’s no more than a two- or three-hour drive from where you live,” he says.

Whether you’re buying the home to rent out or for personal use, review the following questions with your advisor, who will bring in a Bank of America lending specialist, to discuss whether this purchase might be right for you.

How will you finance the purchase?

“Interest rates for second homes are slightly higher than primary home mortgages, and you may need more than the standard 20% down payment,” says Sydney Ivey, managing director, Wealth Management Banking Products and Solutions, Bank of America.

You can write off mortgage interest on a second home loan — same as on a primary residence — up to a combined $750,000 for both residences.³

In a hot market, paying in cash can allow you to move swiftly to nab a home you want, so it might make sense to borrow against investments using a Loan Management Account® (LMA®) from Bank of America. “Ask your advisor and Bank of America lending specialist to help you weigh the pros and cons of different financing options, as well as how the additional outlay might affect your progress toward other important financial goals,” Ivey says.

What about ongoing expenses?

The purchase price of the house is just the starting point. You may want to do an extensive renovation before you move in. Besides the basics like furniture and kitchenware, you’ll also be on the hook for recurring expenses like insurance, energy, Wi-Fi and landscape care. A general rule of thumb is to put aside 1%–4% of your house’s purchase price each year for maintenance costs. You’ll also have to pay property taxes, and in some jurisdictions, you may have to pay taxes to support your school district. Talk to your financial advisor about whether you’ll have to make any trade-offs to afford these ongoing costs.

Are you prepared for worst-case scenarios?

You should also run the numbers on some unforeseen expenses, such as having to overhaul the septic tank or covering a steep rise in homeowners association fees. “I tell my clients that if they can easily afford those unexpected things, in addition to the cost of the property, and it doesn’t put a stress on their budget or put other, more essential goals at risk, then chances are they can afford the home,” Ivey says.

Where can you command the highest rents?

You might assume that the best rentals are those near tourist attractions, but while those homes sometimes command a premium rate, they’re often limited by seasonality, says Venezia. Beach houses and ski chalets, for example, often bring in cash for only three to five months of the year. In his experience, some of the highest occupancy rates are for long-term rentals — for instance, ones that cater to visiting faculty in a college town. Talk to a local real estate agent about features that renters in the area typically want, such as parking or outdoor space.

How will you manage the property?

If you’ll be using an online home-sharing service or a local real estate agent, you can expect to pay up to 30% of your rental income to the company that brings your renters in the door, says Venezia. And keep in mind that renting to others means a lot more wear and tear, especially if you’ll have a stream of short-term renters coming and going. Expect to spend another 20% of your rental income each year on repairs, he says, and consider hiring a property manager or local handyman to help with maintenance. The upkeep may be more than you want to manage yourself as you age.

What tax breaks might you get?

The IRS considers a property that is rented for 14 days or less each year as a personal home, in which case, you can’t take deductions on any expenses. If you intend to rent out the place for 15 days or more a year, your mortgage rate could be higher, notes Ivey, and a higher down payment will likely be required.

You may be able to deduct mortgage interest, property taxes, operating expenses, depreciation and repairs, depending on how you use your second home. You can maximize those deductions if your own personal use of the property does not exceed 14 days per year, or 10% of the number of days the home was rented to others at a fair rental price, whichever is greater, notes Venezia. Also keep in mind that some cities and states charge a lodging tax for rental revenue earned within their jurisdictions. Talk to your tax professional about the rules that may apply to your situation.

One final tip: After considering all the above with your tax professional, advisor and a Bank of America lending specialist, consult your heart — and talk with family members. Doing your homework before purchasing a second home can help ensure that you’ll continue to view it as a benefit, not a financial burden.