With interest rates at record lows, many believe it is the best time for buying a second home — or a first one. Owning a second home can provide retirees, or even younger families, a mountain retreat, a house at the beach, or even a near-city getaway for family vacations or quick weekend excursions. However, it is a riskier investment than most people realize, and it takes a lot of work.

The National Association of Home Builders estimates that Americans own about 7.4 million second homes, which is about 5.6 percent of the total housing stock. Obviously a fair amount of buyers are doing it, but if buying a second home is in your plans for 2021, you should be sure to consider all the upsides and downsides before committing. 

Patrick Rush, CEO of Triad Financial Advisors and the ForbesBooks author of Gain Big and Give Back: Financial Planning with Intention offered List With Elizabeth a few things to consider about investing in a second home.

What to Consider When Buying a Second Home

He said the first thing potential second home buyers need to establish is precisely why they are thinking about buying a second home. Is the home for personal use? Or is it merely an investment? What will the home mean to the buyers both emotionally and financially?

There are two primary real estate investment strategies for buying a second home, either to flip and resell it, or to rent it out as a source of passive income.

“People tend to purchase a second home either as a rental property or a vacation home, which they might also rent for part of the year,” Rush said. “But unless you’re in a hot real estate market, the return on investment usually isn’t worth the hassle. There are better ways of growing your money.”

“Real estate doesn’t automatically mean easy money,” said Rush. People mistakenly believe real estate provides a guaranteed return, but that’s not always true. 

Rush recalls one client who, over Rush’s vehement objections, withdrew all of his retirement money to build an expensive second home. The client was certain the house would pay off, but he eventually was forced to sell it for half his investment.

It’s also true that renters can end up costing you money. Even if you ask for and check references, you can’t guarantee that other people will take care of your property. And sometimes a security deposit just doesn’t cut it! 

Even if renting is out of the picture and your plan is to flip and resell, remember that this only generates money if you’re ready to put in the work. 

“It isn’t as glamorous as HGTV makes it seem!” Rush said. There’s way more hassle and headache to home renovations than they cover in those 30-minute episodes. You need to consider whether or not you have the skills, patience, and time to flip quickly.

You also need to think through the full financial implications — property tax, homeowners association dues, insurance, maintenance, and specifically capital gains tax. This applies to you if you sell something for more than the price you paid for it, like a house. If you flip and resell a house without owning and/or living in it for at least two years, you’re likely going to pay taxes on the profit. Make sure you prepare for that extra expense and don’t get caught off guard.

Of course, the most common reason for looking into buying a second home is for personal vacation use, which is an excellent reason to consider a second home. But don’t base your decision on pure emotion or a desire to keep up with the Joneses.

“Many retirees end up regretting it,” Rush added. “They feel they are forced to go to that second home every weekend just because they spent so much on it. [Still], a vacation property or second home can certainly provide a lot of joy.”

The downsides certainly don’t stop people from buying second homes, though, and none of this means a second home is a mistake, Rush said.

Still, before buying, consider the overall impact on your life. Most people don’t have endless streams of money, even if they have done well for themselves financially. So, a splurge in one area often requires a sacrifice in another. “If you want the second home, then perhaps an Alaskan cruise won’t be in the budget,” Rush says. “It comes down to what your priorities are.”

It could be a tough financial decision, but if done for the right reasons and with the right research, buying a second home could also be one of the best decisions you’ve ever made.