August 9, 2017

Family on beach with dog SVKWhen you’re on vacation, the allure of securing a slice of family fun year-round can be appealing. How can you bottle that vacation bliss for you and your loved ones? Buying a second home is the most commonly contemplated answer.

Vacation home ownership offers distinct perks, and many adults have fond memories of cherished vacations enjoyed at the family’s beach cottage or lakeside cabin. However, vacation home ownership also entails a significant investment of money, time, and other resources. Like any major financial decision, it’s worthy of careful consideration.

 

Can You Afford A Second Home?

This is the most important question your family should consider. Vacation home ownership can be expensive, with costs extending beyond the down payment, mortgage, taxes and insurance, to include:

  • Upkeep and fees: Maintenance may include yard work, pool care, cleaning, repairs, etc. Buying a condominium might divest you of some of these demands, but generally there’s a condo fee to pay in return.
  • Furnishings and supplies: Unless you buy a fully furnished home, you’ll need to outfit your vacation property, and ensure adequate safety features for younger kids.
  • Travel and entertainment: Don’t forget to factor in travel costs for your family to visit, plus the additional costs of vacationing e.g., eating out, entertaining, and enjoying local recreational activities.
  • Other Family Objectives:  Additionally, consider if buying a family vacation home might infringe upon or preclude other financial objectives, such as college savings.

What Mortgage Rate Can You Get On A Vacation Home?

Interest rates on second home mortgages are typically on par with primary residential mortgages. Furthermore, mortgage interest and property taxes are tax deductible. However, be aware that interest rates and tax laws change if you own three or more homes and/or if you rent a property.

Do You Want To Travel?

If your family loves vacationing in one particular spot, buying a second home there might make sense. However, if you prefer a variety of travel experiences, a vacation home investment might tie you all to one destination, leaving you or other family members feeling like options are limited.

How Frequently Can You Visit?

Consider everyone’s schedule (including job, school and college requirements) and the distance to your potential vacation home. Both factors are prime determinants of how frequently you might visit. We suggest calculating your annual expenditures to support a second home, then dividing the total by the estimated number of visits per year. This yields a per-trip cost that can be compared to the cost of other vacation alternatives.

Should You Rent Your Vacation Home?

One way to defray the costs of second home ownership (and justify occasional use), is to rent out your vacation home. While this can generate income to offset ownership costs, renting also brings additional expenses and responsibilities such as:
• Cleaning services.
• Property management.
• Additional maintenance requirements.
• Wear and tear.
• Additional tax reporting requirements.

Tax Note:  People often anticipate income tax benefits associated with real estate depreciation expenses for vacation homes. However, relatively low income limits prevent passive loss utilization for many individuals. Be sure to seek tax advice before considering rental property ownership.

Do You Enjoy Hassle-Free Vacations?

A vacation should be a time to relax and enjoy, but second home ownership comes with responsibilities and repairs. If you don’t want to take care of these while visiting, and other family members aren’t willing to pitch in, a second home might not be right for you.

Is The Property Easy To Maintain?

Some properties are easier to maintain than others, like condos versus single family homes. It’s important to evaluate the costs and time involved, plus resources available locally.

Have You Visited During Different Seasons?

Second home ownership is year-round (unless you buy a timeshare unit), while most tourist destinations are highly seasonal. While you and your kids might love a location during your vacation, it could offer a completely different experience at other times of the year. Be sure to visit during off-season, to explore the climate, community, resources, etc.

What About As Your Kids Get Older?

Children’s habits change as they age: what was appealing may no longer be of interest as your kids mature. Furthermore, tweens and teens often become engaged in sports, social networks, and other activities that might tie you to your primary residential location in future years.

Are You Buying At The Top Of The Market?

The real estate market has been hot for several years, as the economy recovers and interest rates have remained historically low. While a low interest rate environment makes financing affordable, an uptick in rates or a downturn in the economy could negatively affect future property values. If you’re buying now, make sure you’re in it for the long-haul and that you’ll be comfortable if the value of your vacation home fluctuates.

What Is The Projected Resale Value And Tax Impact?

It’s always important to consider potential resale value for any property you purchase. Real estate in vacation destinations can be highly cyclical, meaning that values can vacillate far more than other year-round locations. Evaluate historical values to get a feel for possible resale value. Also, beware that second home sales do not qualify for the capital gain tax exemption unless it was your primary residence for three out of the past five years.

What About The Future?

Looking long-term, many of these considerations apply if your vacation home might ultimately become your retirement home or a primary residence by transferring ownership to another family member. In such cases, additional recommendations would include proximity to family and friends, and renting for a year before making a permanent commitment.

If you hesitated on a few points, traditional vacationing might still be the best solution for your family. Conversely, if you’re still excited by the prospect of a vacation home, then it’s time to delve further. SageVest CFP® advisors can work with you to evaluate financing, tax, and related financial matters, relative to your individual and family financial and life goals.  We invite you to contact us to discuss a second home purchase or broader financial topics.

Prepared by SageVest Wealth Management, a certified financial advisor. Copyright 2017.


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