"An empty man is full of himself." -- Edward Abbey

Saturday, May 8, 2021

Second Home -- a Good Idea?

      So my wife and I are finally traveling. We're vacationing in South Carolina and visiting children and grandchildren while we're here, as we've done almost every year since the kids moved down from New York in 2012.

     We always get our own place when we come. Their house really isn't big enough to accommodate us. Plus, we'd rather be out at the beach rather than in the suburban development where they live.

Our rental. Would you buy it?
     It only takes a few days for us to become accustomed to the Carolina beach lifestyle, which at this time of year involves throwing open the windows to the sea breezes, wearing t-shirts, and going out to the beach or up to the marina to watch the sunset.

     And it only takes a few more days before we start looking around and begin thinking about buying a second home at the beach -- or near the beach. Lots of other people do it. Why can't we?

     Just last night we ate outside at the Salty Dog Cafe. We were outdoors so we didn't have to wear masks. There was a nice breeze wafting off the water so we didn't even have to worry about Covid. After dinner we walked up along the boardwalk, got ice cream, then stuck around to watch the sun set over the sailboats. We strolled down the boardwalk, eyeing the condominiums that face the water and the sinking sun beyond. 

     This morning I recalled reading an article about owning a vacation home by Jeremy Kisner, director of financial planning at Surevest Private Wealth in Phoenix, AZ, who writes a blog Clear and Concise Financial Advice. I thought I'd better consult the piece to get a dose of reality. Is it really a good idea?

     Here's what Kisner says about second homes:

     I thought vacation homes sales would be breaking records since Baby Boomers are better positioned to buy them than any previous generation. A number of other factors should also be propping up the vacation home market: a strong economy, a decade-long bull market in stocks, low mortgage rates.

    However, vacation-home sales, despite having picked up within the last year due to the crosscurrents of Covid, have actually been relatively weak for the past decade. For example, price appreciation in popular vacation home areas lagged non-vacation home areas by some 10 percentage points from 2015 through 2018.

     One reason vacation home sales have lagged may be airbnb and other similar sites. These services have made it easy to find vacation rentals in desirable places -- without any down payment, mortgage or upkeep costs.

Jeremy Kisner
     Are you still tempted to buy a beach house, mountain cabin, or Gulf-side condo? If so . . .

Here are a few things to consider before buying a vacation home:

     Costs. The median vacation home price nationwide is over $200,000 -- higher in popular beach locations. In Delray Beach, FL, for example, the median house price is over $300,000. Even if that seems reasonable to you, do not underestimate the ongoing expenses. A modest home will likely have up to $1000 in monthly expenses (taxes, utilities, HOA, maintenance).

     Financing. Approximately 30% of second-home buyers pay all cash. The remaining buyers need to come up with a hefty down payment. Most banks require 25 to 30% down on a vacation or rental property. They also require a higher credit score and charge higher interest rates. This is because these properties have more severe default rates than primary residences.

     Insurance. Homeowner insurance tends to be more expensive for vacation homes than for primary residences, because vacation homes are at greater risk for damage or theft since they are not lived in year-round. You may be required to carry a "landlord policy" which can cost 20 or 30% more than typical homeowners insurance. In addition, many homes are in hurricane or flood zones. Due to more severe storms, flood insurance costs have gone up significantly in recent years.

     Renting it out. People who rent out their vacation homes do so for an average of 18 weeks per year, according to HomeAway, a vacation rental marketplace. Property management firms typically get 20 to 35% of the rental income. Or you can do the work yourself. Some people make a decent side income by renting out their guest house on airbnb or VRBO. However, it usually takes a few hours a week to respond to inquiries and coordinate check-ins, check-outs, reviews and cleaning services. For more information about potential rental income vs. expenses consult this rental income resource.

     Classification as a Rental Property. If you limit your personal use of your second home to 14 days, or 10% of the time it's rented, it can be classified as a rental (investment) property. That means you can write off most of the expenses (insurance, maintenance, utilities, interest, depreciation) against the rental income. If the result is a loss, it is typically considered a Passive Activity Loss which in most cases can be used to offset other income on your tax return. 

     Classification as a Vacation Home. On the flip side, your property will be categorized as a vacation home if it is used primarily for personal use. You do not get to write off all the expenses like you do with a rental, but you can still write off the interest expense as an itemized deduction assuming you meet the requirements. In addition, you can rent your place for 14 days or less and keep that rental income tax-free, with no extra reporting requirements.

     Second homes can be a great place to make memories with your kids and grandchildren. They can also be a major expense and/or commitment of time. So a piece of advice: the wealth-maximizing strategy for a second home is to have a friend or relative with a vacation home ... and then an offer to house sit.

25 comments:

Anonymous said...

Back in the 1980s I was working in an investment banking firm and I became convinced that our best path to financial freedom would be to purchase a property in a desirable vacation locale. We visited the Florida Keys and toured a few places, which convinced me further that this was a solid plan, even if the Keys themselves might be too much of a risk. We saw great townhouses with windows overlooking ocean views from every single room, including laundry room - all for a price in the $80,000 range, a bit more than homes were going for in our hometown but still easily in range, especially when considering what we would have gotten in rental income. Alas, my ex-husband was something of a slug and I just couldn't convince him. Eventually this and many other differences in how we viewed life resulted in divorce. I never did buy a vacation condo, but I did buy and reno a duplex on my own, which has provided me enormous financial security.
Nina

Mona McGinnis said...

Down payment, mortgage payments and upkeep costs aside, the thought of maintaining a second home is more than I would want. Looking after one residence is enough for me. Yeah for ventures like AirBnB, VRBO and hotels.

Arkansas Patti said...

I'm with Mona. Also it would lock in your destination each year with no freedom to try different locals and even eco systems. Of course your family makes the same location each year a positive. Good luck.

Rian said...

I would love a second home, especially somewhere by water... but know that it's a dream that will never be a reality. Keeping our home maintained now in retirement takes a bit of our finances. Besides, we can always visit like you're doing now... and it sounds heavenly... to be able to walk by the water and feel the sea breeze. Enjoy your time there. Whether you seriously consider buying a second home is your decision. In our case, I don't think I could handle all that it entails... maybe when we were younger, but not now.

Tom said...

I'm afraid, like a lot of things, when we're younger we don't have the money; when we're older we don't have the energy. I wouldn't mind locking in my destination, but alas, my wife B is more venturesome. She wants to go to Europe and Key West and Bermuda ... and maybe some other places, too. Who knows?

DJan said...

It feels like both a time sink and a money pit to me. I wouldn't do it for many reasons, not the least of which is that we don't have the money. We do live within walking distance of the bay, and an hour's drive from the mountains, so we already have pretty much everything we have wanted. I traveled extensively in my job and don't have much wanderlust left. :-)

Olga said...

I am seriously considering selling quite possibly both the VT condo and the FL mobile home. They both feel like vacation homes, which leaves me with the feeling that I somehow don't have a "real" home at all. Talk about first world problems, but it really is taking its toll. Honestly, more emotional than financial. And yes, there is something about not being able to travel more broadly because I feel I have to be one place or the other.

Kathy @ SMART Living 365.com said...

Hi Tom! I think you know my views on 2nd homes and other "toys." But in case not here is a post I did a while back about them (if you don't want it here please just delete https://www.smartliving365.com/smart-buy-second-home-rv-boat/ ) At any rate my perspective is a bit different than the other blogger you mention. Plus we are definitely more like B. We don't want to ever be tied to any one vacation place...Besides, when you do go there you end up doing all the deferred maintenance on the property and waste your vacation doing that. Just rent! ~Kathy

Pam said...

We own two homes, presently, and I will admit that I cannot wait to sell our bigger place. It's hard to explain, but everything changes when you become an owner of that second home, instead of a vacationer. In addition to what Kisner said, there's simply the general worry about what's going on with the property when you're not there. But the biggest complaint hubby and I have is the exhaustion of keeping up with two places. There's twice the paper trail to follow, whether it's insurance, taxes, utility bills, etc. I would opt for vacation rentals, especially since B wants to go to various locations. (You guys need to keep us girls happy!)

Liz said...

Here’s another viewpoint: We have been wintering in rental homes in SW Georgia for more than 10 years. Lots of reasons why we went south but mostly related to dogs. Two years ago I retired and we got serious about finding our own winter home in the community. We closed on a lovely, well-priced, brand new home on 1/2 acre on the literal eve of the pandemic lockdown (2/28/20). We financed the purchase with the community bank, not pulling out the whole purchase price from our investments and endearing ourselves to the banker who is a wonderful resource. Our realtor, former Airbnb host, banker, yoga instructor, and new neighbor all connected us to the resources we need to keep an eye on things while we are back in the frozen north. Not a money pit or a time sink, nor do I feel locked into my destination. It’s just a different departure point. The key for us is that we are homebodies, foodies and dog people. In our second home I have my own kitchen with my pans, a dining table, nice table linens, and a screened porch and a fenced-in yard.
Tom, thanks for the opportunity to share this. I’d be way happy for everyone to be vaccinated and all the pandemic risk behind us, but I’m also delighted with our choice on a winter home.

Tom said...

Good point about the luxury of having your own things in your vacation home. But it helps to be near family. B has borrowed several items from our daughter in law that are missing from our rental kitchen -- a sharp knife, a couple of leftover containers, a few glasses. We hope to remember to give them back before we leave.

Bethany @ Happily Loco said...

I can see the perks of having a vacation home if it is a place you visit a lot. Having a space of your own, with all your own things, is a wonderful luxury. We have often enjoyed having an RV (or right now, a boat), as a portable vacation home. For our situation, it is the best of both worlds!

Mage said...

Nope, and nope to one of those large motor homes with our budget.

Carol Cassara said...

I've had two homes on and off for 30 years and it's great. I know have a home in California and one in my hometown in western NY. Keeps me from being bored, that's for sure!

Janette said...

We are offering to build on a suite on the back of our daughter's home. It would increase the value of their houses AND it gives us a place to stay. They will probably be in the house for about ten more years---then we all can figure out what is next. I wish I had done the same with my brother when he divorced. Housing was cheap in Phoenix (which is why his house e sold for nothing) and I would have "saved" thousands in Air bnb stays.

Laurie Stone said...

I used to think a vacation home sounded great. But seeing what others have gone through -- fluctuating rental markets, hurricanes, upkeep, declining home values (at times) -- I'll stick to Air B&B.

Wisewebwoman said...

I did this for about 5 years and I'm telling you it was exhausting. Maybe if I had a partner it would have been easier but I never stopped with the maintenance of both places. I had paid cash for the summer home but it needed a lot of work. I eventually sold up the Toronto house and moved to the beach house. And that's another story!

I think when older it really needs to be thought about carefully. As in why not live in the beach house year round?

XO
WWW

Rebecca Olkowski said...

Although I won't have to worry about buying a vacation home at this point, I probably wouldn't because I wouldn't want to feel obligated to always vacation in one place. I'd rather see more of the world. But your vacation sounds sublime. Have fun!

Linda Myers said...

We have two small places - a daylight basement in our family home near Seattle that got converted to an open, airy apartment for six months (May to October), and a park model (trailer) in a retirement community in Tucson for the winter (November to April). We think of both of them as home, and we travel from both of them. We're lucky to have family or friends who watch out for them when we're not there.

Tabor said...

Maintenance would be the worry for me. With hurricanes and storms, there is always something to fear. I also like to visit different parts fo the country as well as different parts of the world and will probably continue renting.

Sue said...

Dear Olga, a resounding YAAYYY to people with their "first world problems." Uhm, we don't kowtow to ugly (demonic) statues, and we worked. That's why we have stuff.

Janette said...

I have to admit, Sue, I don't understand your comment.

Sue said...

Janette, having "first world problems" sounds like an apology for being blessed (by the Lord) to live in a first-rate nation. Nope, am not the least bit sorry.

Kay said...

Nope. Definitely don't want a 2nd vacation home. I know my son wasn't thrilled when he discovered that we bought a home FAR from the beach. (1/2 hour away) He had visions of walking out to the beach in the morning and going surfing on vacations. However, we've told him about beach erosion here in Hawaii, rising ocean levels, tsunamis, etc. And yes, it's BAD enough that we have all the costs and headaches of keeping our present home in repair. Sigh. So no, we'll rely on Airbnb or a hotel/motel for vacations.

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