By Greg Sullivan

Wouldn’t a vacation home at the beach make a great getaway, someplace you can go to leave the stresses of the workaday world behind? Then, in 10 or 15 years, when you’re ready to retire, you’ll move there full time. After all, you love the area—and it will be a great investment, too!

If this is your thinking, you’re not alone. An estimated 1.13 million vacation homes sold in 2014, representing 21% of real estate transactions.¹

But how many of those purchases end up matching the romantic view imagined by the eager homeowners? Avoid a retirement fail by performing your due diligence before sinking cash into a second home.

How Will You Use the Home?

The first thing to think about is what you expect from your second home:

• How often will you use the home?
• Are you buying the house as an investment, expecting that it will greatly appreciate in value over the life of your ownership?
• Do you want it solely as a weekend or vacation property, for exclusive use by you and your family members?
• Do you plan to rent it when you are not using it?
• Is this a place you plan to retire to?

The answers to these questions will help you decide whether a second home is right for you and, if it is, how much you can afford.

Most people buying second homes have mixed motives, and often these motives are driven by emotion rather than pure reason. While buyers might plan to offset expenses by renting the house out when they won’t be using it, they aren’t necessarily choosing a house for its viability as a rental—and often they don’t consider what renting out the property will involve.

Think about what your current life is like and how you envision spending time at your vacation home. If you are not planning to spend at least two months out of the year at the home, you are generally going to be better off, financially, if you rent a house to vacation in. If you expect to be living in the home for at least two months, look at the costs and at your financial wherewithal. And if you are planning to use the home for four, five, or six months out of the year, you should certainly investigate ownership.

Great Investment? Not So Fast…

Many people believe that real estate is always a good investment. When clients tell us that investment is a main driver in their desire for a second home, we suggest that we analyze the purchase over time (including all of the ongoing maintenance, insurance, taxes, and other costs involved in owning real estate) and compare it with other, easier-to-manage investment choices. Most clients are surprised when they see the analysis. People often forget that houses require a lot of money to keep running properly.

Do the math: What increase in home value will you need in order to break even when you sell, given all the costs you will incur? (Closing costs at purchase and sale, together with the cost of furnishings and maintenance costs, typically add 20 to 30% to the initial price of the home.) Looking at all the costs involved, calculate the increase in price needed in order for you to make a 7% return on your investment.

Every home purchase needs to be evaluated individually, as each scenario is different. In most instances, though, the math of owning a second home is not as wonderful as you may have thought.

Investing in Leisure Time

the right decision for you. There can be many intangible benefits to having a second home, including making memories with loved ones and simply enjoying life. These are things that have an emotional value that can’t be calculated.

But you need a realistic idea of how much you can spend on the house on a per-month basis, looking not only at the purchase price but at all the operating costs. Many people who contemplate a second home are either retired or are nearing retirement, so they are contributing to retirement funds as they prepare for post-work life.

When you are planning to put money into a second home, you have to make sure you have enough in liquid assets to take care of your cash flow needs. Figuring out how much you can safely put toward your second home means examining your current home expenses, debt, and any other obligations such as child support and contributions toward retirement plans, and then balancing those financial obligations against your income.

Weighing the Risks

When people look to make big decisions such as buying a second home, we, as financial advisors, do our best to lay out the analysis, to help sort through the pros and cons so that clients can make the best decisions for themselves. We certainly raise red flags where we see them, but there is never a guarantee of how things will turn out, one way or another.

Everyone is happy when they buy and the real estate market goes on a nice run and prices go up, but you can’t count on that. You also have to account, when weighing risks, for the possibility of hurricanes, mudslides, and other natural events that may strike, especially in desirable coastal areas. Plan for the worst and hope for the best.

Step back and make sure you’ve considered all aspects of buying a second home before you go ahead. Crunch the numbers and talk to others who have purchased vacation homes before jumping in yourself. And if you determine that it’s the right move for you, you will be able to sink your toes in the sand with the peace of mind that comes from a decision well considered.

Cheers,
Greg

To learn more about Greg or want discuss retirement visit, SBSB Financial Advisors.

1. National Association of Realtors, 2015 NAR Investment and Vacation Home Buyers Survey, April 2015. Accessed March 17, 2017. https://assets .documentcloud.org/documents/1699245/2015-nar-vacation-amp-investment-homes-survey.pdf↩