Thinking About Buying a Vacation Home? Five Tips for a Better Personal and Financial Experience

As the weather warms and summer vacations begin, many people naturally think about buying a vacation home. In some cases, such thoughts may be little more than pleasant daydreams after a relaxing trip. In others, however, a second home is a reachable and viable goal.

But, as with any matter involving both finances and family, it’s best to think through a few important details in advance. In our experience working with multiple families who have gone through the process, that is the best way to ensure satisfying outcomes – both personally and financially.

1. Know why you’re buying it

Do you view a second home primarily as a family asset or as a long-term investment? Some combination of both? There is no right answer, of course, but if your home is mainly about providing a family getaway, it’s important to know if everyone is on board. Is it easily accessible for everyone or does it require long or complicated travel? Asking these types of questions will ensure that you use the home frequently and that kids and grandkids will visit often. It’s also important to consider whether future generations will want to own the home after parents are gone.

Looking at the investment potential, are you planning to rent out your property to other vacationers? Is such income necessary to justify the investment in the first place? If so, do you have a clear sense of the necessary costs and time commitments? Many owners use a property management company and/or third-party services that assist with the rental and maintenance processes. For example, VRBO.com (Vacation Rental By Owner) is a common website that serves as an online rental marketplace. Bear in mind that these services can still create a substantial amount of work to manage. The ongoing wear and tear and necessary maintenance costs must be taken into account as well. You must ask yourself if you are comfortable with others in your home and with your belongings.

Lastly, we wouldn’t necessarily advise the purchase of a second home as a substitute for a diversified portfolio if the goal is to fund retirement spending. That’s why, in most cases, we explore the drivers behind the purchase that go beyond a pure “investment.”

2. Consider renting first – and maybe even for the future

If you are seriously considering a second home purchase, renting for an extended period in the area can be a very useful first step. Because your second home is likely to be your vacation “spot” for a long time, it’s best if you love the area – including during the off-season.

Some people may even feel “stuck” with a second home after a honeymoon period ends, especially if it reduces the time and money that can be spent on trips to other destinations or different types of family experiences. Thus, renting may also be a good long-term alternative for those who want to preserve the flexibility to travel to many different locations.

3. Define your budget conservatively and include cushions to avoid unpleasant surprises

This is a critical step. Even people who develop well-defined budgets may overlook some of the costs associated with a second home. We have seen too often where “surprise” expenses significantly drive up the cost of purchasing, building or furnishing the new home. Maintenance costs may also be higher than expected. In the worst situations, there may even be stress on the retirement plan. This is how the dream of home ownership most commonly goes wrong. So any budget should have cushion for the unforeseen expenses.

Overestimation of rental income is another common issue. Don’t assume that rental activity will be steady or lucrative. When budgeting, it’s best to overestimate on expenses and underestimate on rental income. If there is no plan to rent to others, you will want to be sure that other sources of retirement income can support the costs of owning two homes.

4. Understand the tax implications – the devil is in the details

Many buyers may view second homes in states with low or no income tax as a key part of the financial justification, without a full understanding of stringent residency requirements. Some states and cities put a very high burden of proof on buyers who attempt to switch their primary residency.

Further, extensive recordkeeping may be necessary if you are looking to write off renovation or maintenance costs on a second home. Tax deductions related to depreciation may exist, but you’ll need a clear grasp of those details to ensure you qualify. Rental property may also complicate your tax return more than you realize. For all of these reasons, we recommend talking through a second home or rental home purchase with your tax advisor long before closing the deal. As with all things tax related, a little advance planning goes a long way in this area.

5. Don’t overlook safety and security concerns

Once you’ve purchased a second home, your to-do list changes. Safety and security should be near the top – especially if either of your residences is going to be unoccupied for long stretches of time.

An experienced property management company can be a good solution – especially for ensuring renters don’t cause undue damage. Most can periodically check on the property while you’re gone and even provide formal reports. Getting to know your neighbors (especially permanent residents), groundskeepers and others who are there when you are not is a good way to develop extra eyes and ears.

Some of our clients can’t imagine a life without their second homes, which they associate mainly with good times and family memories. But, unfortunately, we’ve also worked with clients who’ve had less than great experiences. If you’re considering such a purchase and want to increase your chances of being in the first group, please consider these few relatively simple – but critically important – steps to ensuring your second home is a sweet one, too.

 

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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