Financial Planning

Do the Proper Research

First consider total cost. Similar to a first home, the actual price of the second home amounts to more than the asking price. Vacation homes are often inherently more expensive because they are situated on prime real estate.  Looking past the purchase costs, there are taxes, insurance, maintenance and upkeep.  Even cutting the grass or shoveling snow could be an unexpected expense. From our experience, up to five percent of the sales price of a second home will go toward the ongoing costs of owning and maintaining it, and this amount should be considered up front. 

For example, if you purchase a $500,000 home, the annual ongoing costs of taxes, maintenance, upkeep, and mortgage payments could easily equal $50,000 or more.  This is money not being spent or invested, and therefore not working for you. Also, if you plan on taking $500,000 out of an investment holding to pay cash for the home, this could be up to a $25,000 loss in earnings.  Knowing how often you will use the home will help you assess its true value. Said differently, if you visit once a year, that vacation costs a minimum of $50,000.

Determine Utility

An important question to ask when considering the purchase is that of “utility.”  How do you plan to use the property?  Will it be an investment or will family and friends use it on a regular basis?  This is a major consideration that will affect the cost and value of the home. A vacation home should be purchased because you will use and enjoy it, not because you think it will be a good investment. Utility trumps investment in this situation. If return on investment is desired, then every alternative must be evaluated in addition to the real estate.

With this in mind, it may be more cost effective to take regular vacations, which can be cancelled or rescheduled if necessary. What if a family member becomes ill one year and you cannot make the trip?    What if the family tires of the location or the house after a few years? To make up some of these costs you could choose to use the home as an investment.

Utilizing the home as an investment could limit your family’s access to it, but could help offset some of the maintenance costs.  If you are only buying a second home for vacation purposes, some questions to consider include: Does the home have enough rooms to accommodate everyone?  How accessible is the home?  Is the location one that can be enjoyed by all? If you’ve purchased a villa near a ski resort, yet you travel with family with a history of back and knee problems, you may not visit as often as planned.

Seek Objective Advice

It is easy for us to play devil’s advocate, as we’re not standing in front of your dream vacation home wondering, “Will I ever be able to return to this memorable place?” Passion for a location or love of family and friends can make the business aspect worth the cost and effort. On the other hand, home ownership is not the only option. Time-sharing, co-purchasing and renting are all options that require less of a financial commitment. You could travel the world extensively staying at 5-star resorts for less than $50,000 annually.

As with any decision, your financial advisor can help weigh the pros and cons and consider the true cost before becoming emotionally committed to spending the money.  When advising our clients, we always take an objective, comprehensive approach. This includes considering cost, location, travel ease, investment, family utilization, cost of tax and maintenance prior to advising a purchase.