Daydreaming of owning a second, seasonal home? A mountainside vacation house with a fireplace or two, ski-in access and powdery slopes nearby or perhaps lake front property with front porch and a sweeping view of the sunlight on the water?
Sounds enticing, but fulfilling this dream takes attention to detail and a firm vision of your long-term goals.
Two financial factors may help bring your daydreams closer to reality: the 80-year long-term stock market rise (despite some slides) and interest rates that remain historically low (past performance is no guarantee of future results).
Yet in addition to housing costs and interest rates (not to mention your lifestyle preferences, the home’s location and conditions of the real estate market), you should take many considerations into account before purchasing a second home. If the factors add up right for you now, owning a vacation home may bring years of happiness. But if the time isn’t right, re-evaluate your long-term goals to see if you can buy this home in the future — and avoid a ton of hassles today. Issues to explore:
Location, Location, Location
Heeding the first rule in any real estate transaction, think about how far you wish to travel from your primary residence or business (and the travel costs involved), the natural or recreational opportunities, economic history and current conditions of the new region and state and property taxes.
Financial Preparedness
Ensure that the new home won’t compromise or threaten your long-term financial goals. If you have a chronic illness or medical needs, for example, you want your income, assets and savings to cover those costs first. Your financial advisor may be able to help assess your preparedness and guide your strategy to buy a second home while keeping your long-term goals on track.
Count All Costs
The true cost of owning a vacation home goes beyond the purchase price and mortgage interest rate (if you choose to obtain a loan.)
Maintenance, utilities, property and state taxes, prices of seasonal activities, weather concerns and insurance all change constantly and add up quickly.
Consult with a real estate agent as well as with a tax advisor as you evaluate these variables. Investment, rental property, legacy or fun house: If interested in this property purely for investment, think about improvements the home may require, the availability of skilled help in the locale and the economic history and vitality of the community. Also consider how long you want to — or must — retain the property to get a reasonable return on investment.
Tax implications arise if you hope to derive income from renting your vacation home (a tax advisor can enumerate them).
Renting your property may force you to incur some additional expenses — repairs of tenants’ damage, for example.
If you hope to simply treasure time at a second home — escape for solitude, recreation or making memories — the new place can potentially turn into your retirement home. Is that attractive to you? Do you hope one day to make your vacation home a legacy to be handed down for generations or is your interest more short-term?
Co-Ownership
The more might seem the merrier when owning a vacation home, so you can split costs — but make sure you iron out what happens if one owner can’t pay the agreed-upon share of expenses.
Consider forming a limited liability company (LLC), which exempts you personally from legal and financial liabilities of ownership. With the LLC owning the property, details are outlined from the beginning in case someone runs into financial trouble. Another option may be for an individual or couple to own the property and rent to others.
If you want to create a legacy, a trust can facilitate passing the property generation to generation with the least confusion. Discord created with the other owners may outweigh the benefit of sharing the mortgage payments, taxes and other expenses, however.
Regardless of what you decide, consult an attorney to fully understand the implications of your decisions.
When you’re thinking about a second home, your heart and head must work together so you meet all of your needs.
About the Writer
Heidi Clute, CFP, is the owner of Clute Wealth Management, a registered investment advisor in South Burlington, Vt., and Plattsburgh, N.Y., an independent firm that provides strategic financial and investment planning for individuals and small businesses in the Champlain Valley region of New York and Vermont.
