Investing in a Second Home: Is it the Right Move for You?
Whether you’re a working professional who dreams of building a legacy of memories for your children, or a Baby Boomer approaching retirement, eager for a retreat that will draw your friends and family near, the second home trend has its appeal.
A second home looks different for everyone – it may be a house in Ocean City, a cabin set on a lake in Maine, or a peaceful retreat in the countryside. But no matter what it looks like, the big-picture questions are the same: Is it a smart investment? How should it figure into your long-term financial goals and retirement plan? How do you weigh the financial investment with the time and emotional investment?
Here are a few benefits and considerations to keep in mind when evaluating whether investing in a second home is right for you:
Turnkey convenience, tailored to your taste and needs
When you have a second home, you can pick up and go with little to no notice – no reservation required. When you arrive, you’re home – no need to settle in and no chance of being disappointed if your rental doesn’t match the pictures from the online ad. The home is decorated to your specific style and taste, with the amenities that you value and enjoy. Plus, all your vacation clothes, linens and recreational items are in one place and ready for use. Another added benefit is the opportunity to invest in your own equipment – whether it’s camping gear, beach chairs, kayaks, etc. – that you can enjoy year after year.
Immediate return with potential long-term value
At the point of purchase, there is immediate value in the utility of the home. To help offset maintenance and upkeep costs, you can choose to rent out the house. But, keep in mind that managing a rental takes time and resources and that you will need to fit yourself into the rental schedule. In the long-term, the house may serve as a retirement residence. Or, if you monitor the market and sell when conditions are favorable, you can aim to make a profit.
A place to make memories and build your legacy
A second home is more of an emotional investment than traditional investments, such as stocks or bonds. Whether you have a young and growing family or you’re nearing retirement, a second home can serve as a gathering place for family and friends – a place to retreat, discover new hobbies and passions, start traditions and make lifelong memories. Establishing a secondary residence also gives you the opportunity to build new friendships and community outside of your hometown. For many families, the sentimental value attached to a vacation home far exceeds its financial value.
Maintenance and upkeep costs
There are carrying costs associated with a second home, including taxes, insurance, utility bills, and general maintenance. As the owner, you are responsible when something goes wrong – whether it’s a broken window, leaky roof, or liability from an injury on the property. Some homeowners will hire a management company to clean and maintain the grounds, particularly if they plan to rent out the property – however, this additional cost can cut into revenue. Homeowner insurance rates and mortgage financing terms also tend to be higher and more restrictive.
Reduced flexibility to travel and experience new places
Keep in mind that if you’re paying a mortgage and taxes on a second home, you’re probably going to spend most of your vacation time there. To make the most of your investment, you may feel compelled to visit your vacation home as often as possible, foregoing other options. Plus, the associated costs may start to cut into your budget to travel elsewhere. If you like to explore new places and go somewhere different every summer, tying yourself down to one destination might not be the most strategic move.
Financial risk and tax complexities
As with any investment, there is financial risk involved in owning a second home. Real estate is illiquid – there’s no predicting what the economic climate will be in 20-30 years and whether conditions will be favorable to sell. Before you decide to buy a second home, consult with a trusted financial advisor to evaluate your options. A financial planner can conduct an overall cost-benefit analysis and help gauge the impact of the purchase on your long-term financial security and retirement plan. You should also consult with a CPA to evaluate the tax implications, weighing factors such as expected use and revenue from rent.
