Should you or shouldn't you?
Have you been daydreaming of owning a second, seasonal home? A vacation home situated on a mountainside with a fireplace or two, ski-in access and powdery slopes nearby – or perhaps a lakefront property with a front porch and a sweeping view of the sunlight on the water…sure sounds enticing.
A Financial Sweet Spot
More than just wishful thinking - may be stirring your dream of owning a second home these days. A financial factor contributing to bring these daydreams closer to reality: interest rates that remain relatively low.
Twice as Nice?
In addition to housing costs and interest rates, there are many considerations to take into account before purchasing a second home, and when combined with your lifestyle preferences, the home’s geographic location, and market conditions – you face a complex and uniquely personal decision. If the formula adds up for you now, owning a vacation home may bring you years of happiness. But if it doesn’t, it’s best to re-evaluate your long-term goals to see if you can get there in the future, rather than jumping in too soon.
Here is a brief summary of issues to explore to see if second home ownership is for you:
- Location, Location, Location: Always the first rule in any real estate transaction, you need to think about how far away you wish to travel from your primary place of residence or business (and the travel costs involved), the natural and/or recreational opportunities, economic history and current conditions of the region, and state and property taxes required for the property.
- Your Financial Preparedness: Cash is king in real estate and can make things happen quickly, but you also want to be sure that your long-term financial goals will not be compromised or threatened by second home ownership. If you have a chronic illness or medical needs for example, you want your income, assets, and savings to be able to adequately cover those costs. Your financial advisor may be able to help you assess your preparedness and/or offer guidance on a strategy to make a second home a reality, while keeping your long-term goals on track.
- Buyer or Seller’s Market? Be aware of the current market: in a Seller’s market, there may be multiple offers above the seller’s asking price and low inventory in the area you are interested. It may make sense to postpone until a Buyer’s market, when there are usually more options for buyers and generally lower asking prices/accepted offers.
- Count All Costs. The true cost of owning a vacation home goes beyond the purchase price and mortgage interest rate (if you choose to obtain a loan). Maintenance, utilities, property taxes, state taxes, seasonal activities, weather concerns, and insurance can all vary and add up quickly. It is prudent to consult with a realtor, as well as a tax advisor, so that you may evaluate all of these variables.
- Investment, Rental Property, Legacy, or Fun House? If your interest in purchasing additional property is purely for investment purposes, you may want to think very hard about any needed improvements the home may require, the availability of skilled help in the region, as well as the economic history and current vitality of the community. Also consider how long you want to, or have to, retain the property to get a reasonable return on investment (ROI).
There are tax implications if you hope to derive some income from renting your vacation home, and a tax advisor can enumerate them. Renting your property may force you to incur some additional expenses – repairs for example. You’ll want to be fully prepared to manage the activities associated with rentals.
If you are hoping to treasure your time at the second home – escape for some solitude, engage in lots of recreation, and make memories – there is a potential that this will turn into your retirement home. Is that an attractive option to you? Do you hope one day to make your vacation home a legacy to be handed down within the family for generations, or is your interest more in the short-term?
- Ownership. While it may seem like the more the merrier when it comes to owning a vacation home so you can split the cost, make sure you iron out what will happen in the event one owner can’t pay his/her share of the expenses. Consider forming a Limited Liability Company (LLC); with the LLC owning the property, the details will be outlined from the beginning should someone run into financial trouble. Another option may be for an individual or couple to own the property and rent to others. If your goal is to create a legacy, a trust may be an appropriate vehicle to facilitate the passing of the property from generation to generation with the least amount of confusion. The benefit of sharing the mortgage payments, taxes, and other expenses may be outweighed by the discord it creates with the other owners. Regardless of what you decide, be sure to consult with an attorney to fully understand the implications of your decisions.
- Build vs Buy. You may have the perfect plot of land already, or just simply cannot settle for what is available to buy – whatever the reason, some choose to build their second home. A variety of factors will need to be considered for this decision: do you plan to sell the property eventually? How expensive is it to build where you want, and what you want?
- Seasonal Renter. Perhaps you don’t envision spending the summer/winter months in the same place every year. It may be a great idea to rent for a season at a time in different areas instead of purchasing a second home. This approach can give you more flexibility and may also give you a better idea if the reality is as good as the daydream.
In the end, while thinking about a second home, your heart and head need to work together – so that you can continue to meet all of your needs, as well as some of your “wants."
Heidi Clute, CFP® is co-owner of Clute Wealth Management in South Burlington, VT and Plattsburgh, NY, an independent firm and registered investment advisor that provides strategic financial and investment planning for individuals and small businesses in the Champlain Valley region of New York and Vermont. The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations. For a list of states in which I am registered to do business, please visit www.clutewealthmanagement.com.