Summer is the time we think about getting away to enjoy the company of family and friends, and many of us consider purchasing a second home to enjoy on a regular basis. This can be an exciting and rewarding experience, but the decision should not be taken lightly. Many second-home purchase decisions are based on the emotional aspects, while practicality should play an equally important role. Knowing all the financial facts and options before you purchase will reduce surprises.
Researching a Vacation Home
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 furnishings, taxes, insurance, maintenance and upkeep. Even cutting the grass or shoveling snow could be an unexpected expense. From our experience, over five percent of the sales price of a second home will go toward the ongoing costs annually of owning and maintaining your vacation home. We believe you should consider this ongoing expense before you take any action.
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 used for regularly budgeted living expenses and it is also not being invested and, therefore, not working for you. You could reduce your annual expenses by paying cash but in this scenario, taking $500,000 out of an investment to pay cash for the home could result in significant lost investment earnings.
Usage of Your Vacation Home
An important question to ask when considering the purchase is that of “utility.” How do you plan to use the property? Knowing how often you will use the home will help you assess its true value. 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 when considering a vacation home. If return on investment is desired, then every alternative must be evaluated in addition to the real estate.
Using 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. 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?
Get Objective Advice for Your Vacation Home
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 financial aspect worth the cost and effort. On the other hand, home ownership is not the only option. Timesharing, co-purchasing and renting are all options that require less financial commitment. Keep in mind that 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 while considering the true cost. Begin this discussion with your advisor early as it is important to consider all aspects before you become 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. Please let us know if this is a decision you are considering and if you believe that you may benefit from our expertise.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.
There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.