Is a Second Home a Good Real Estate Investment?

[Today’s guest post is a great follow-up to Tuesday’s post where I revealed my annual spending, including nearly $5,000 in expenses for our second home which was used by us or friends pretty much the entire year. The author, Jean-Michel “Mitch” Wasterlain, is the founder & CEO of CAPFUNDR, the curated real estate fund marketplace. CAPFUNDR is a site sponsor, but this site received no compensation for this well-written article. Enjoy!]


Is a Second Home a Good Real Estate Investment?

Physician Financial Services
I just spent a few days at the beach in the Hamptons, New Yorkers’ favorite place to show off their tans and their real estate. To be precise, I was in Montauk, which is a little more laid back than the Hamptons, but has recently become the hottest beach location.

In the real estate status game, I get additional points for staying at a place that is not only south of the highway, but literally steps away from the beach. Unfortunately I don’t own this place, it was just a rental. At the end of my stay I dismantled the poles, folded up my tent, and sadly said goodbye to Hither Hills campground. I must say it was a very pleasant and liberating way to enjoy the beach.



My Hamptons manse boasts 6 foot ceilings and room for a queen size air mattress



This experience got me thinking about second homes. Does it make sense to own or should you rent? Would you be better off by renting your second home and choosing a separate investment that can maximize your returns? Being a real estate guy who has owned vacation homes, I was a little embarrassed to realize that I had never tackled the problem in the serious way that it deserves.


image credit:

This 12 bedroom home in the Hamptons has a bowling alley, a rock-climbing wall, and a home theater with five screens. You can rent it for two weeks for $500,000 just like JayZ and Beyonce did. It’s not on the beach though.


Of course there are many reasons to own a home besides the potential return on investment. There is the comfort of having your favorite toys, books, and furniture waiting for you when you arrive, and the ease of getting away without a lot of advance planning. I merely want to address whether a second home is a good financial investment.

Let’s compare the two options. You can use a portion of your savings to buy a second home, or you can invest the same money in an investment property and rent your home. If you buy, you will incur the costs of ownership and you will also benefit from any appreciation in the home’s value. If you rent, the current return from your investment will help to offset the rental cost, and you may receive capital gains from appreciation of your investment property.

So, what’s the net effect of all this? The first trick is to honestly examine the cost of owning the home. It’s common to underestimate these expenses. Since it’s hard to find a house in the Hamptons for less than $1 million, let’s use a more reasonable example in New York’s scenic Hudson Valley.



Typical Second Home Expenses
Purchase Price $300,000
Mortgage Debt (66.7%) $200,000
Equity Invested $100,000
Mortgage Payment (P&I) $11,458
Interest Cost

(4.0% rate)

Tax Benefit of Interest Deduction (35%) ($2,800)
Property Taxes $6,500
Insurance $1,500
Condo Fees $0
Maintenance,Repairs, Landscaping, Pool, etc. $7,200
Annual Cost to Own $19,800
Annual Price Appreciation (3.3%) ($10,000)
Net Cost to Own $9,800


The Annual Cost to Own is your net cost, after taking tax deductions into effect. Principal payments are not included in this because they are not really a cost – they are reducing your loan amount, and increasing the equity in your home.


These inputs may vary considerably depending on the location, condition and cost of your house, your tax situation, and other things. A few important assumptions and considerations include:


  1. Tax Benefit: Mortgage interest is deductible up to $1.1 million of total mortgage debt, for your primary and secondary residences combined. This analysis assumes that you are able to fully utilize the mortgage deduction, but if you have a large mortgage on your primary residence, you may not be able to take the full deduction on your second home.
  2. Property Taxes: These often go up when you buy a house, because the house is reassessed at the new purchase price. Make sure you calculate property taxes at the going forward rate, not last year’s rate.
  3. Maintenance and landscaping costs: They are often higher than expected. That beautiful English garden may cost you more than you realize, not to mention the putting green. Get bids from local service providers before you buy the house.


Now you know the annual cost to own your home, but how much will it appreciate? That of course, is highly dependent on the location of your home. Nationally, homes have appreciated at an annual rate of 3.3% for the last 25 years. A simple way to look at this is that your $300,000 home will appreciate by $10,000 a year, assuming the average growth rate. If you offset your annual expense of $19,800 with this gain, you end up with a net annual cost of $9,800.

Is 3.3% a realistic rate of appreciation? In the short run, many second home markets can appreciate more than this. But keep in mind that prices in many second home communities are much more volatile than the national average. When the economy goes south, owners may need to sell their weekend house to stay afloat. This makes it tough to come up with a reliable price projection so you may want to use a range of growth rates when you do your calculations.

Let’s look at the alternative scenario, where you rent and invest.


The cost to rent a home comparable to the one in the example would be $2,000/month, or $24,000 for the year. Let’s say that you invested your $100,000 of equity at a total expected annualized return of 15%. This $15,000 of income offsets your rental cost, and you are left with a net cost of $9,000.


Now, 15% may seem like an ambitious rate of return, and it clearly will require you to take some risk. The reason I am assuming 15% is that it is roughly the rate of return you should expect on a real estate fund that uses the same amount of leverage you would have on your second home. Since your purchase of a second home is a real estate investment, comparing it to a real estate fund is more fair than comparing to a bond fund, for example, which would produce lower returns but also entails less risk.

As a reference point, Blackstone has produced an average annualized net return of 17% on its 8 real estate funds, and many lesser known managers have produced higher returns than that. As they say in the disclaimer, “individual results may vary”. For example, returns on individual Blackstone funds have ranged from 11% to 40%.

Here’s the upshot. In this example, it’s practically a dead heat. Renting would be $800 per year cheaper than owning.


Comparison to Rent and Invest Strategy
Annual Cost to Rent $24,000
Income from Investment (15.0%) ($15,000)
Net Cost to Rent $9,000
Benefit to Rent vs. Own $800


Does that mean you should be indifferent between owning and renting? No – in many situations, one option could be significantly better. So here are some factors that can swing your decision:


Factors that Favor Owning

  1. You are buying in a strong market that is not overly dependent on second home buyers
  2. You are buying a house with relatively low property taxes and low maintenance requirements
  3. You love to talk about your beach house at cocktail parties


Factors that Favor Renting

  1. You can’t fully utilize the tax deduction
  2. You don’t use the house year-round, so you only need to rent for the season
  3. You prefer to talk about your amazing investments at cocktail parties


For me, the day will probably come again when I want to own a place where I can sleep in my own bed and invite friends and family on a moment’s notice. But for now, I’ll spend $35 a night to pitch my tent on the beach and invest the difference more productively.

Mitch Wasterlain

[PoF: I am a second home owner, and for a brief period a few years back, I owned five homes (three outright, two mortgages)! There are different ways to analyze the various costs and opportunity cost of owning real property, but putting a price on managing multiple properties, and all the things that can go wrong with them is a vexing task.

For further reading, check out this forum thread from the White Coat Investor from earlier this year. The overall sentiment was in line with this post. A second home might be a good idea if you really want a second home, but is probably not a good financial investment.

Initially, I balked at the 15% expected return cited in this article, even though that is in the ballpark of actual returns of some real estate funds. The paragraph explaining the use of leverage similar to what you would have with a second home was an addition that completed the picture for me. It is important to understand that these are projected returns, and not guaranteed. With increased reward comes increased risk. There is no free lunch.

As an aside, don’t you love the fact that this executive pitched that tent on his recent vacation? My last night away from home was spent in a similar, albeit somewhat smaller contraption designed for backpacking.

Someday soon, I will tell the story of our second home, and run some numbers to calculate the true cost to us. That should be enlightening for me, and hopefully for you as well. Until then, thanks for reading! I look forward to seeing your comments below.]


  • Since you own a second home PoF, I’m glad you’re going to tackle this one! I’d like to see those numbers!

    Every real estate market is different, but to me a second home looks like just more consumption….and pretty inefficient consumption at that! (Much of the time second homes sit empty)

    Most people probably only have 4 weeks of vacation a year…that’s 1 month of the entire year they could possibly utilize that vacation home.

    I know a lot of people rent out their vacation homes to offset the annual costs, but I can’t help thinking it ends up looking like an Airbnb rental financially.

    • Thank you, my eight tentacled friend. I like the straightforward approach taken by Mitch, but of course the numbers don’t tell the whole story. There are some tangible and intangible costs and benefits, and variables, such as having tenants use it when you don’t.

      You are right, though. A second home should be considered a consumption item. Some argue that a first home is a consumption item, a concept that is tougher to accept.



    • I agree that most second homes are underutilized and their true cost per use is off the charts. I know people who use Air BnB to manage that efficiently but they are essentially in the hotel business.

  • We own a second home but went in to the decision with eyes wide open that it would clearly be an expense. We can’t rent ours out (only annually) but we have chosen not to do because we vacation there now. Our vacation home will turn into our “winter home” in the next year when both kids are off at college. We bought a 2 bed/2 bath condo for $45K (an estate sale) just over a mile from one of the most beautiful beaches in the United States! We can walk or ride bikes there and we did a ton of research on area homes (and the area itself) before we bought. When the deal showed up – we just wrote the check because we were well prepared. The numbers are incredibly important but the story is too. Nice analysis here.

  • The Green Swan

    Thanks for the guest post, Mitch. This can be a tough argument either way with so many factors at play.

    First, not sure I’d be comfortable with a mortgage on a second home if I had one on my first home still.

    Second, not sure I’d factor in 12 months of renting. While still working, I’d probably only get to utilize it a few weeks a year and maybe some long weekends. Once retired I would spend time equally between the homes.

    Also the benefit of renting is being able to vacation and rent anywhere rather than being committed to the same spot all the time.

    Lots at play, but similar to the sentiment in other comments, I would view it as an investment choice but as a (costly) lifestyle choice.

    • Thanks Green Swan. I agree that most people would not need to rent for 12 months. In many second home locations, however, 80% to 90% of the annual rent is attributable to the peak season, so unless you like to go to the beach in the winter, you might not save that much.

  • Here is a different perspective perhaps to add to the discussion:

    A second home need not be underutilized. We bought a second home three years ago (carry no mortgage on it) and don’t rent it out. We host no cocktail parties, don’t embrace starting the weekend with Magnums of Crystal and a Porsche has never crossed the entry of our driveway. It is a 3-bedroom home on 2 acres in the heart of NE ski country with mountain/valley views to die for.

    So how can it not be underutilized, you may ask? Well, we use it nearly every weekend (>75%) and also for family vacations (summer or winter – we alternate) and through all holiday season breaks (Christmas, New Year and Thanksgiving). It will be the home we retire early to in two years. It actually feels more like “home” compared to our primary home. Could we have invested those dollars in the market? Perhaps. Has it hampered our ability to explore other parts of the US, Canada and European travel? Eh, no, in a nutshell. Travel hacking is our friend as it is for many.

    Just like living, it is not about the money. Never will be.The experiences we gain as a family and the joy in our children faces when we are out in the mountains at weekend and on vacation doing things we love is worth so much more than money. Those who live a life obsessed by money will never ever get this concept. It is strange to them, alien thinking.

    If you use your money to do the things you love and that involves a second home to enjoy those experiences to the fullest, why not? As long as you are not overextending your annual expenses or putting other important life plans in jeopardy then a second home can bring amazing things to those families that earn enough and work hard to make it happen.

    Thanks to PoF for getting a very productive discussion going on his blog on a topic that is polarizing and has many facets.

  • grbkeb

    Okay, I had to chime in on this one since there are so many gaping holes in the analysis here. First off, I’ll give the author a pass because it is nearly impossible to fully walk through this subject in a few paragraphs, and I do believe in spirit he was trying to paint an unbiased picture for making the decision, but…

    1) I am no financial wizard, but I know you sure and the hell cannot deduct presumed appreciation of 3.3% from your annual cost of ownership. If you are a CFO and book earnings that haven’t had a real transaction and do that on your financial statements you go to this thing called prison for cooking the books. Your real cash outlay is the full amount. I understand if you go out over a long enough time horizon the appreciation will be there, but deducting it in your decision making equation up front is not very responsible.
    2) A bunch of expenses are missing or glossed over for your second property. Do you not want cable or the internet while there? Maybe you already have enough “stuff” to fill it, but there will absolutely be more “stuff” needed that will add up. Kitchen stuff/bathroom stuff/decorations/lawn jarts…this stuff isn’t free!
    3) How about inflation? The author states that the home appreciates, well guess what, everything else does too, so you are really just treading water unless you happen to catch lighting in a bottle location wise (which can absolutely happen).
    4) How about the cost of capital that you are tying up in those mortgage payments for the next 15 years as well? Understand its not much up front but over time it matters, especially if you are assuming 15% returns because you are hitting a home run with REITs.
    5) So do you really want to take every vacation to the same spot every year multiple times a year? I’m actually in favor of this one, but I think it is important for other people to think about. For some its hard to break away from working and if you have a place it sort of forces you to take a vacation so that is a good thing. Reality is you’ll still be vacationing other spots so thinking it is lowering you overall vacation spend isn’t accurate in most cases.
    6) Did everybody just forget what happened a few years ago? Please go watch the movie The Big Short again before going out and purchasing a second home that you are going to have to put a mortgage on and hope for steady appreciation of the entire market because everybody else is doing it. Also, hope that you don’t have to try and get your $100k out the next time the cycle dips for a few years like it always does.

    All of this being said, people are going to do what there heart tells them to do, they will rationalize their decision with whatever facts or numbers help their case. Rationalize: to attribute (one’s actions) to rational and creditable motives without analysis of true and especially unconscious motives. It should be noted though that if you fully realize that this is a lifestyle choice and not a financially prudent move. If you have your nest egg and first home paid for and the expenses still allow you to be under a 3% burn rate, go for it. If you have an awesome job and safe income stream or streams that also allow for this, go for it. You can’t take it with you after all, and having those memories are more important than a fatter bank account. I just feel the due diligence in such a process is a little more involved than what this short article was able to get into.

    • You make a number of good comments, and while I don’t have room to address all of them, I would like to share a few thoughts:
      1) My objective was to compare the long term total returns of the rent and own strategies, not to do a cash flow analysis. On a cash flow basis, the cost of ownership is quite a bit higher as you have to pay principal on your loan and you don’t benefit from the appreciation until later. On an economic basis, it’s fair to take appreciation into account as an alternative investment in real estate or stocks would also have an unrealized capital gain component.
      2) there are many costs I didn’t include, like cable TV and furniture, because I was comparing this to a long term rental where you would still incur those costs.
      3) I did not take into account some factors, like inflation, that affect you whether you rent or own. Property expenses go up over time, and so do rents.
      As you and other readers have pointed out, the analysis is very situation specific and there is no generic right answer.

      • grbkeb

        I absolutely get it, its just a really complicated decision that is very challenging to sum up in a few paragraphs. I do think you were fair in not trying to paint a rosy picture that is all puppy dogs and ice cream cones. On a blog site that is aimed at helping people become financially independent, the answer should be pretty damn simple, if you have to dig into the details of cost you probably cannot afford it. 90% of all the second home owners that I know, most of whom are very wealthy would recommend against it. I say this because a few years ago I asked the same question, and they overwhelmingly convinced me against it. A few years later I retired at 43 and was extremely thankful that I didn’t have the headache. Its funny because the more abundance financially that I have in my life I find more happiness in making it simpler with less stuff even though its not a financial burden to have more.

        I’ve made a lot of money in real estate (not my day job) buy purchasing properties that people financed when times were good and the math told them they could afford it. There are always opportunities out there, but I recommend being in a cash position to act quickly when they arise.

  • financialibre

    This is a compelling read – thanks for hosting this discussion and very good guest post, PoF! Some great comments here as well.

    Though I’m not sure the analysis is structured quite like an economist would likely arrange it, I think the numbers seem like a fair starting point, even given some possibly controversial inputs.

    One important issue not explicitly mentioned is the concentration risk associated with owning a second home versus investing the equivalent amount in alternative vehicles. There’s plenty of concentration risk investing in the alternative RE funds mentioned in the analysis, so the idea’s kind of baked in there. But really accounting for this directly would tend to distort the numbers in favor of not owning a second home.

    On the other hand, the comments on consumption preferences, enjoyment, etc. – especially Mr. PIE’s great comment – are right on target. Everyone’s preferences are different, and consumption wouldn’t be expected to meet the same economic tests as investments, so it can be troublesome comparing the two head to head. (Note: I’m also firmly in the camp of belief that a home – primary or secondary – is a consumption item that just happens to have some investment-like qualities, so maybe I view this differently from how others reasonably might. Just my humble thoughts made in the spirit of discussion.)

    Regardless, this is a great topic for dissection, and I’m pumped to see great stuff on such a complex topic! Many thanks!

  • I’m an investment guy and remember the trailing returns and the assumptions on Dallas real estate in the early 1980s, just before the energy bust. There was plenty of evidence that 15% annual returns were on the conservative side, even for all-cash deals. With leverage, the sky was the limit. In the event, all of those Texas deals blew up and most sank without a trace, even some of the all-cash transactions.

    In an environment of 0% cash returns, assuming 15% returns, even on leveraged real estate, seems like dangerous fantasy to me. My guess is those returns were earned on funds set up in the wake of the financial crisis, taking advantage of prices a fraction of those available today. I know a consequential real estate investor in Silicon Valley, and he considers any return north of 5% to be worth taking a second look.

    Second, the assumption of 3.3% on the rental house is likewise high, unless we have a return of inflation. Since 1915, per Robert Shiller, the real price return on residential real estate has averaged 0.6% per year. So at 0.5% or lower inflation, a 1% price return would seem more realistic.

    I think the best way to think about this is to ask, as several already noted, whether this is really a consumption or investment decision. First, is this second home a precious permanent part of your lifestyle, something you would sacrifice all kinds of other consumption to fund? (In our area, Jersey Shore homes are in this category for many.) If so, this is a non-negotiable, and ultimately non-financial decision.

    Otherwise, the sensible question is, “Am I better off renting or buying this lifestyle?” If you can rent it for less (and this is almost always what our numbers show for Jersey Shore properties), then buying is a speculation on future price increases. Probably a foolish speculation, since being able to rent for less already demonstrates that the sales prices are irrationally high, considering the property as an economic investment. (To go slightly deeper, even at today’s low rates owners break even buying at or below 15x rents, but Jersey Shore properties actually sell for 25x to 40x rents.)

    Even if you can torture the numbers to show a potential profit on the purchase, the question of the risk of a single property versus a diversified portfolio is hard to ignore. Plus you need to keep in mind that asset prices are inflated by cheap money, pretty much across the board.

  • Another scenario is to buy a second property purely as an investment that cash flows. Use that cash flow to vacation wherever you want. You’ve basically created an engine that has tax benefits, should appreciate over time, is building equity (thanks to your tenants) and funds your vacations. Oh… and you can still brag about it at parties!

  • Excellent commentary across the board. As I mentioned in the post, I am a second home owner, and I will do my best to address some of the comments and questions in an upcoming post. There are many, many variables when it comes to second homeownership. There are entire industries built around them, and the ability to share them for others (for a price). It’s more than I can tackle in this blog — but I can share my experience, which is what I plan to do.


  • Very interesting article. We have oscillated back and forth on buying a second property for about two years now. Honestly we would split it’s usage between rent and use which probably would even out the expenses listed. Ultimately the real reason we don’t is the maintenance bucket. Knowing me I’d want to do my own maintenance to save money. Ultimately that would result in me spending my limited vacation time fixing the house. So much for vacation.

  • Great analysis. It looks like with so many moving parts, an $800 p.a. difference is pretty much a tie. For me personally a second home with a cost of around $24,000 (either direct cost or opportunity cost) seems a bit out of reach in early retirement. That would be in the ballpark of our entire annual travel budget (!) in retirement. So I am really looking forward to the number-crunching on a less than $300k property, like the PoF cabin.

  • My experience is that a vacation property is a TERRIBLE investment. You won’t go as much as you think you will, and you can use the money you would have spent to go anywhere else with very luxurious accommodations.

    But, it’s been 10 years since I bought my vacation property in Lake Tahoe, and I must say the memories are priceless. It’s where I took my wife on our first excursion date when I landed in SF. And, it’s where I proposed. How can that not be one of the most worthwhile investments of all time?!



    • Agreed, although ten years ago was a terrible time to make any real estate purchase or investment. Six or seven years ago there were bargains to be had.

      You can’t put a price on memories, experiences, or wives (at least not in this country!). Those are the things that can make a second home worthwhile as long as you can afford it.


  • Simple Money Man

    I think the biggest thing that’s stopping me from investing in a real estate property and renting it for income is the level of involvement (e.g., finding tenants, advertising, maintenance – which could be volatile, etc.). Sure I can hire a company, but I still feel like it won’t be as passive as other investment I can just buy and hopefully watch grow in the long term. Lately I’ve been thinking about adding REITs as an alternative investment to get into real estate and to diversify.

Share your thoughts with the PoF community.