Imagine your best friend offers you a “good deal” on a condo in Florida (or a cottage on Lake Michigan, or a mountain home in the Rockies…you get the picture.)  “Wouldn’t that be great?” she says, as she tries to convince you of the wisdom of such a purchase. 

As you romanticize what it might be like, a dark cloud forms as you contemplate two days of packing followed by two days of driving for a two-week vacation, four states away. OUCH! This shining opportunity is losing some of its luster, but why wouldn’t you want to enjoy an “opportunity of a lifetime?”

What to Consider

As with all financial commitments, this should be evaluated thoughtfully.  Assuming your family is well positioned for retirement, here is a list of considerations when evaluating a second home:

Does it make financial sense?

The biggest issue with ownership of a second home is that it becomes an imbedded expense.  If you have excess cash flow and have addressed all other financial goals, you’re okay. Also, if a second home would essentially replace travel and other costs that are already imbedded into your financial life, then it is cost neutral. Make sure you understand the realistic monthly expenses and potential major periodic maintenance. Can you afford them without impairing your normal lifestyle?

Does it make logistical sense? 

Clients who have really enjoyed a second home tend to buy one that is closer to where they live. Packing a family up on a Friday night and driving 1-2 hours for a weekend at the lake seems to have the highest cost vs. benefit advantage.

Will you use it?  

If this is a location you can enjoy visiting over and over and over, this purchase might make sense. If you prefer to routinely travel to different venues, being “forced” to go to one spot can get old. Do you love traveling to foreign countries, visiting national parks, or taking annual cruises? If so, a second home can begin to feel like a ball and chain. Like any asset, the more it is used, the more intrinsic value it offers.

Will others use it?  

The ideal situation we have seen is when a second home becomes a family retreat where parents, kids and grandkids love to gather and enjoy fishing, hiking, swimming, games, and fun for all ages.  imply confirm that your family is as excited about an annual pilgrimage to the family retreat as you are. It won’t be as enjoyable if they start going on other fun or educational trips and begin to abandon the family retreat.

Will it be difficult to maintain? 

The farther away (and the further north) a second home is located, the more difficult it can be to maintain when you’re back home. Addressing frozen pipes, mold issues, vandals, and storm damage yourself, from long distance, can be a challenge. If you are lucky, there may be a neighbor or friend that lives nearby, who alerts you when things go wrong. Imagine a vacation home in Florida or in the Caribbean that is hit by a hurricane. By the time you arrive, you will be at the back of the line behind locals who have already lined up the local contractors to repair their homes. Hiring a management company is one option but understand the expense up front.    

Will you be able to quickly sell it in the future?

The ideal situation occurs when homes or condos maintain their value due to steady market demand. In resort communities, markets can be finicky, as there will be “hot market” years and years when nothing is moving. So, if you are fine with being able to take your time, selling when the market is booming, this isn’t a barrier. Timeshares, on the other hand, can be impossible to unload at fair prices, even in great markets.  

Is owning better than renting?

The biggest selling point for second homes is that “owning is better than renting. If you are renting, you are throwing money away.” This presumes that you buy low, sell high, and have controlled expenses. As financial advisors, we have been able to model and illustrate that this selling point is overly simplistic. A second home can be a great use asset, and if lucky, it can pay for itself in the long run. 

Renting, on the other hand, allows you to enjoy the pleasure of different venues without the financial and emotional commitment of ownership. More importantly, renting is not an imbedded expense. If you have a year with poor cash flow, you can adjust your vacation plans to the type of venue that is affordable that year.

Would modeling help?  

We are always happy to affirm, through modeling and thoughtful discussion, the purchase of a second home. (Or an RV, houseboat, or similar major purchase.) We are also glad to be the excuse you may need to gracefully bow out of an awkward situation. So, if you feel cornered, feel free to simply say, “Let me run that by my financial advisor.”  We are always happy to be the independent voice that may help you to affirm a great financial decision or prevent a bad one. 

Kristina Bolhouse CPA/PFS, CFP®
Vice President/Shareholder

© 2021 The Arkansas Financial Group, Inc., All rights reserved.

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