Are Second Homes an Investment?

There are between 5.7 and 6.5 million second homes in the United States. That represents a meaningful portion of the housing stock, about 5% if you consider that there are about 133 million households in the US.

When people hear the phrase second home, they often picture an oceanfront mansion owned by someone in the top one percent. But when you compare several million second homes with the total number of American households, it becomes clear that ownership extends well beyond the ultrawealthy.

Some are lake cottages that have been in families for generations. Some are small condominiums in warm climates. Others are hunting cabins, inherited homes, or houses purchased near children and grandchildren.

This raises an interesting question. When does a second or third home become an investment rather than simply a vacation property?

Ownership alone does not make something an investment.

A vacation home is primarily purchased to provide a personal experience. That is consumption, even when the asset increases in value.

There is nothing wrong with consumption. The problem arises when people describe a lifestyle purchase as an investment to justify spending more than they can comfortably afford.

An investment property begins with a different question.

Instead of asking, “Would I enjoy owning this property?” the investor asks, “What economic problem does this property solve, and what return should the capital produce?”

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