Second-Home Dreams Need a Reality Check

Encourage clients to consider these critical factors before they get swept up in putting a bid on a second home.

By Mike Leverty
Mike Leverty
Mike Leverty

Owning a second home becomes an appealing and common goal for clients transitioning into retirement. Whether it’s a warmer climate, a northern cabin retreat, or a second home closer to children and grandchildren, a second home can offer a break from the daily grind and a sanctuary for relaxation and leisure.

However, before making this significant investment, several factors need careful consideration to ensure it aligns with clients’ financial plan and ideal lifestyle.  Advisors can provide valuable guidance not only on the financial aspect but also on the non-financial decisions, including location, the maintenance and time commitment of owning multiple homes, and usage goals for the second property.

Can the kids get there?

While certain destinations may be ideal for short vacations, they might not be the perfect fit for a second home. Evaluate the proximity of essential amenities such as healthcare facilities, shopping centers and airports. And don’t forget to consider the convenience for friends and family who may visit.

We worked with a client who had purchased a winter warm-weather destination that was easily accessible with a direct flight from their local airport. But when their grown-up children secured jobs in different states, they soon discovered the challenges of finding direct flights to their parents’ location. The original plan was for the children to visit frequently for extended weekends, but the limited availability of flight options frequently hindered or restricted these visits. These factors may not be top of mind or as important when planning a summer vacation or a spring break trip.

Will maintaining two homes be a hassle?

Owning a second home demands regular upkeep, particularly if you spend significant time away from it. Reflect on how involved you wish to be in managing the property. Are you capable of handling routine maintenance and repairs, or would you prefer hiring a property management company to oversee these tasks?

Additionally, think about the distance between your primary residence and the second home. A property located far away may present challenges in terms of accessibility and the ability to respond quickly to emergencies. The maintenance items at a primary residence will also need to be addressed. Remember, spending time at the new home will eat into whatever time the homeowner currently commits to tending to routine maintenance at their primary residence. Clients often tell us that they are making trips to the cabin to simply mow the lawn, only to hurry back to their primary home to meet a contractor for a maintenance item on that property.

Is rental income a goal?

Those considering a second home should also clearly define their intended usage. Will the property be exclusively for personal use, or does your client plan to rent it out to help offset the financial impact?

If they plan to rent it out, consider the added maintenance and property management fees, as well as accessibility of the property during rental periods. It’s essential to thoroughly research the local market to confirm if any restrictions are in place for short-term rentals.

Meanwhile, those who have never rented out their home may find that the idea of strangers using their property is a concern that potentially outweighs any potential financial offset. We have worked through multiple financial plans that initially show rental income offsetting some of the added costs, only to later remove the income source when the client determines they no longer want to rent out their home.

What’s the total financial picture?

Once location, maintenance and usage goals are defined, the financial implications of purchasing a second home need to be fully addressed. In addition to the purchase price, the added costs in retirement can be significant and require careful consideration.

It’s important to assess if your client’s financial plan can support the purchase by allocating capital or if they’ll have to get a mortgage.

While the idea of being free from debt and payments may appear appealing to the client, it’s important to note that making a substantial distribution from a portfolio in a single year to cover the purchase might not be the most tax-efficient strategy. It’s crucial to carefully assess which assets should be sold with regard to their tax implications and strike a balance between financing a portion of the purchase and maintaining a debt free retirement.

In addition to the purchase price, you and you client must consider the ongoing maintenance costs and factor them into cash flow. Owning a second home means having twice the utility bills, property taxes and insurance, and additional travel expenses between properties. It’s also important consider the cost of hosting friends and family at the second home.

Final words

Buying a second home in retirement can be fulfilling, providing a destination to relax and enjoy newfound retirement freedom. However, it requires careful thought and consideration.

Encourage your clients to avoid rushing the decision, as adjusting to the retirement lifestyle may take time, and their priorities and preferences may evolve. To gain firsthand experience, it’s beneficial to consider renting in various locations for a few years before committing to a large purchase. A financial plan that factors in a few years of rent expenses can allow clients to explore various locations before committing to purchasing.

Giving careful thought and consideration to all the decisions around a second home will help ensure that your client’s decision aligns with their long-term goals and bring added joy to retirement.

Mike Leverty is founder and CEO of Leverty Financial Group, an advisory firm registered with the SEC. This article is for informational purposes only.  Leverty Financial Group does not provide tax, legal, real estate or accounting advice.



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