Many people dream of having a place to call home in their favorite ski, beach or tropical destination. While owning a second home may make sense for a variety of reasons, it’s a major decision that can impact one’s financial situation for years to come. If you’re contemplating a second home at your favorite vacation spot, here are some things to consider.
1. What is your primary purpose for the home?
If you envision the home as a second family space, be sure it’s truly a good fit for your lifestyle. If you are still working and can only use it for a couple of weeks per year, the expense and upkeep may be hard to justify—unless it provides the vacation escape of your dreams. If you are retired or planning to retire, the purchase may be more worthwhile. Alternatively, if you are imagining it as a rental property for a long-term resident or short-term renters, there are other considerations. Is it reasonable to assume that the potential income generated makes it a good investment, especially when considering other costs (see below)? Or are you looking at this as a property that needs improvement but that you can eventually sell for a profit after you put some work into it?
2. What is your financial ability to carry a second mortgage?
If you need to take out a second mortgage to make the purchase, will it create any risks for your monthly cash flow, either now or in the future? This question is particularly relevant if you already have a mortgage on your primary residence or are close to, or in, retirement. Taking on debt will carry a degree of risk regardless of your financial position, so you need to feel confident that it will not be a stretch for you. If you can afford to pay cash for the property, the question is whether that is the most effective use of your available funds compared to investing it in other ways.
3. Is the home located where you want to be?
If you plan to use the property for your own purposes, be certain the location is appealing to you. For example, if you are looking for a warm weather getaway for the winter, will the home meet your needs? If you are considering renting out the property, is the location one that can attract renters at a price that makes it a worthwhile investment?
4. Are you prepared for the extra expenses?
Beyond the initial purchase and mortgage, prepare to duplicate other expenses you already have with your current home—utilities, furnishings, maintenance and improvements. If the second home is far away from your current one, consider the cost of hiring professionals to help with managing and renting the property. Additionally, you may want to meet with a tax advisor who can help you assess the possible tax implication of a second mortgage or rental income.
5. How does the purchase fit within your overall financial plan?
Perhaps the most critical question is what your purchase means from a comprehensive financial planning perspective. Does it fit your overall strategy and help you achieve your primary goals—or at least not detract from achieving them? Talk to your financial advisor to help you evaluate the financial wisdom of this move before you make a final decision.
Rocco A. Carriero, MBA, CRPC, is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Southampton, NY. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 16 years. To contact him: 631-283-8482, 1673 County Road 39, Southampton, NY 11968 or roccocarriero.com. Advisor is licensed/registered to do business with U.S. residents only in the states of NY, NJ, TX, MA, PA, NC, NH, UT, NV, CA, NM, WA, VT, MS, MD, RI, FL, MO, SC, GA, MN, CT, AZ.
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