Are you in the market for a second home? 

In recent years, we’ve seen an uptick in retirees who want to buy a second home to be near their out-of-state kids, or to vacation during this new chapter. Considering whether you are financially prepared to invest in a second home can be a crucial step in averting potential issues in the future. Prior to making a purchase, it is essential to review several key factors, including your overall financial situation, the property’s location, rental possibilities, and viable exit strategies.

Are you financially ready to buy a second home?

Assessing your current financial situation before signing on to a second mortgage is critical. Anlalyze both the up front cost of purchasing a second home (down payment, taxes, etc.), as well as ongoing costs.

Ongoing costs may be more than you anticipate. For example, you might have to budget for:

• Upkeep and maintenance
• Property taxes
• Mortgage
• Travel costs (if the home is out of state)
• Cost of living differences for when you’re traveling
• Maintenance and housesitting for your primary residence when you travel
• Utility expenses

And more. 

Even if all of these expenses are within your financial means, it’s worth asking whether or not they’ll impact your other financial goals. Will you be able to retire on time if you take on a second mortgage? Will you be able to enjoy as robust of a lifestyle with new ongoing expenses eating into your cash flow? These questions matter, and can help you to determine if a second home is right for your lifestyle.

Location, Location, Location

Where your second home is located could significantly affect your finances and lifestyle. Financially, location can impact: 

• Property taxes
• Estate planning taxes and considerations
• Mortgage rates
• Property value and the stability of the location’s housing market
• Current home prices 
• Cost of living there (even if only part time)

Your lifestyle will also be impacted by location! For example, if you choose a second home that’s a 2-3 hour drive from your primary residence, you may be able to use it more often. Alternatively, picking a second home that’s an airplane trip away, you might want to consider where you’d like to stay for weeks or months at a time to maximize your investment.

To Rent or Not To Rent?

Renting your second home adds another layer of complexity to your financial situation. First off, rental income is considered taxable, which means you’ll have to report it to the IRS. The good news is that you can also deduct certain expenses related to the rental property, like maintenance, repairs, and even property management fees. There’s also an opportunity to deduct a portion of the property’s value over time to account for wear and tear (depreciation). 

However, it’s also important to remember that renting your home comes with additional ongoing costs like maintenance, cleaning fees, or even hiring a company to manage the short or long-term rentals for you. Landlording is no small task, and before you dive in headfirst, it’s important to weigh the financial pros and cons and decide whether the lifestyle drawbacks are worth it to you in this season of life.

Have An Exit Strategy

Having an exit strategy when buying a home is a crucial aspect that many prospective homeowners tend to overlook, but it can make a world of difference. Before buying a second home, consider factors like the home’s resale potential, the neighborhood’s growth prospects, and the overall real estate market conditions. 

Part of having an “exit” strategy can look like debating whether or not having a “partner” in buying a second home makes sense. Many family members or friends opt to buy a vacation home together. On the surface, this may look like a great idea – you’re sharing costs, and nobody has to put up as much cash up front for a down payment. However, exiting a property when you have more than one buyer has the potential to be a nightmare. You may want to sell, and your partner may be uninterested or unwilling to. Debates may arise concerning the division of expenses and the ongoing financial and property management responsibilities.

It also helps to remember that gifting your second home to your kids as part of an estate plan may cause more of a headache than it’s worth. More often than not, heirs don’t want to move into the family vacation home. So, unless your kids or grandkids have expressed a clear desire to maintain that tradition, plan a way to sell the home down the line.

Is a Second Home Right For You?

Keep in mind that there are many options that support travel and vacationing both before and during retirement. Many families opt to rent a nice place each year that allows them the flexibility to travel to different locations and try out different vacation homes rather than being “locked in” to one spot. Alternatively, you might decide to always rent the same place and skip the ongoing maintenance costs and risk associated with owning a home.

If you’re considering a second home for personal use or to rent, we’d love to hear from you. Working with a team of financial advisors can help you to determine if a second home is financially feasible, and what tradeoffs (if any) would have to be made to make your dream a reality.