As the summer winds down, I’m sure that many are once again asking themselves if they should own a little piece of paradise. That paradise being a second home near your favorite vacation spot.
Let’s start this analysis on the paradise part. It may be paradise for a week or two at a time, but would it still feel that way if that was the only place you went – year in and year out? For those who prefer to lead the pack and get a new view every now and then, this may not be a good idea.
Then, finances. Maybe you can afford the home, and if your financial forecasts show that you can afford to own this second home without compromising any of your other financial objectives or needs – then this may be for you. But if you are stretching, and will need a big mortgage, a partner or some rental income, beware.
Mortgages are a bit easier to come by than in the recent past, so getting approved for the second home buy may not be the problem. Paying the bills in the event of a decrease in your income, however, may not be so simple.
Whether it is unemployment or health– you’d need to be sure that if your income stopped the day after the closing that this second home would not become a problem. Furthermore, when the real estate market gets cold, and buyers are scarce, vacation home properties often get hit the hardest so selling may not be as easy as buying.
The idea of having a partner in the second home may make some sense. Typically these are often family members looking to make past memories a permanent part of their family legacy. To make this work, you must approach the situation like a business venture. The family should create an entity, such as a trust, to own the property with written and specific provisions to address such contestable issues such as use of the home, your ability to rent your weeks or how to handle capital contributions for maintenance, repairs or general upkeep.
If you need to rent this home to afford it, think twice before you close. The vacation rental market is hot right now – but it isn’t always that way. If vacancies would make this home an unsustainable financial drain – don’t do it. Also consider the maintenance and the wear and tear of having a new crew in your home every week.
And the last issue is that of appreciation. If your motivation is simply to cash in on the possibility of spectacular returns – good luck. That is as much a timing and luck issue as it is skill and brilliance.
I’ve done the math for myself and others many times over the years. For most owners, when you properly include all of the maintenance and improvements in your basis, converting this home into a large capital gain is harder than it seems.