by Kate Ashford | Forbes
About one in eight homebuyers is buying a second home, according to research from the National Association of Realtors. And summer is a time of year when buyers think about it.
Consider: You’ve just had a great summer trip to a relaxing location, and you’re wondering whether you should get yourself a permanent place there. Or you’re emerging from a long, cold winter, and you’re thinking of snagging a condo somewhere warm where you can escape in January.
Before you start putting a down payment together, here’s what you should ask yourself:
Where is it? It’s nice to contemplate a second place in Florida when you live in upstate New York—but are you going to want to jump on a plane several times a year to get there? “It’s ideal to be able to get to your vacation home within a two-hour window, especially if you are working or have a young family,” says Elizabeth Scheiderer, a financial planner in Mayfield Heights, OH. “You’re much more likely to actually use it.”
It’s also wise to think about whether you’re purchasing in an area that experiences severe weather during the year. “Purchasing a second home in a hurricane prone area is not the best decision, which I wish I had known a decade ago when we purchased a second home on Hilton Head Island,” says Thomas Balcom, a financial planner in Lauderdale-by-the-Sea, FL. “Our primary residence is in South Florida, which is often in the ‘cone’ of many hurricanes. This was a hard lesson to learn two years ago when both homes experienced damage during back-to-back storms.”
Have you visited more than once? Ideally, you’ll want to spend a solid amount of time in a location before buying property there. “Get to know the area and whether it’s going to offer you a potential boost in the future or if it’s an area that may suffer economically,” says Monica Dwyer, a financial planner in West Chester, OH. “Does it rely on a specific industry or company, and what would happen if there were a slump in the economy? Find a real estate agent that has a lot of local experience that could help you figure this out.
Would you rent it? If you plan to rent the property to help with expenses, first make sure the community allows short-term rentals. Plan for additional expenses, including a management company, potential damages and repairs, and for the property to go unrented for some periods. “If you use the property for personal use for more than 14 days during the year, then a portion of the expenses will not be tax deductible,” says Nicole Theisen Strbich, a financial planner in Alexandria, VA. “If you are married and your adjusted gross income is above $150,000, any losses from the rental property will not be tax deductible and are carried forward to future years.”
When would you use it? If you’re thinking of renting it out, and you primarily want to stay there when other people would want to stay there, that could be an issue. “If it’s a ski condo and you want it for skiing, that’s also when your potential rental pool would want it,” says Judy McNary, a financial planner in Boulder, CO. “Are you willing to give up use during your desired time? Or is the property in a place that is multi-seasonal that could be rented during high season but used by you happily during shoulder season?”
What kind of lifestyle do you want in retirement? If this second property is for your later years, this is an important thing to consider. “For many, they think their second home should be equivalent to their primary home, and I’d argue it doesn’t need to be,” says Brett Anderson, a financial planner in Hudson, WI. “When you evaluate your lifestyle priorities, chances are you’ll discover you won’t need to spend or invest as much into a second home.”
Have you calculated the carrying costs? Sure, you work the costs of the second mortgage into your cash flow, but have you considered the other expenses that come with a second property? “There could be HOA fees, property taxes, insurance, yard maintenance and cleaning costs,” Scheiderer says. “Especially in resort towns, these services may come at a premium price.”
Does your accountant approve? Have you run your second home dreams past your financial professional? “A wrinkle with buying a second home, stemming from the new tax code, is that the property taxes on the second property will likely not be deductible,” says Samual Boyd, a financial planner in Washington, D.C. “With a $10,000 State and Local Tax (SALT) limitation, most people won’t benefit from any property tax deduction on the second property.”
Can you still meet long-term financial goals? Will you be able to continue to save for retirement, college, a wedding or something else long-term? There’s nothing wrong with shifting a plan for a new priority, but you have to think it through. “I recently spoke with someone about this because they are thinking of building a beach house, and after going through their financial plan and the budget for the house, they may not be able to contribute as much toward their college savings goals,” says Carrie Galloway, a financial planner in New York City. “We’ve discussed and laid out that they may need to sell the beach house or downsize their current home when it comes time for their children to go to college.”
Are you counting on continuous appreciation? “We bought in 1999 and the value went straight up… until 2008, when the value plummeted, along with all real estate,” says Leon LaBrecque, a financial planner in Troy, MI. “We are back on the plus side, and right now, we’re gaining about 4% a year and paying 3.5% on the mortgage, so we are winning. Contrast that to 2009, when we were paying 3.5% and losing 20%. Ugly, and not the kind of investment we like, but we sure used the cottage.”