Summer is here and with it are fanciful dreams of
owning a second, seasonal home. Maybe it’s a
beachside bungalow or a mountain cabin or a
lakefront cottage with a front porch and a sweeping
view of the sunlight on the water. All of them no doubt
sound enticing, but fulfilling this dream takes attention
to detail and a firm vision of your long-term goals.
Two financial factors may help bring your summer
daydreams closer to reality: the 9-year long bull
market rise (despite some notable and recent slides)
and interest rates that remain historically low.
Yet in addition to housing costs and interest rates (not
to mention your lifestyle preferences, the home’s
location and conditions of the real estate market), you
should take many considerations into account before
purchasing a second home.
If the factors add up right for you now, owning a
vacation home may bring years of happiness. But if
the time isn’t right, re-evaluate your long-term goals to
see if you can buy this home in the future and avoid a
ton of hassles today.
Issues to explore:
Location, location, location: Heeding the first rule in
any real estate transaction, think about how far you
wish to travel from your primary residence or business
(and the travel costs involved), the natural or
recreational opportunities, economic history and
current conditions of the new region and state and
Financial preparedness: Ensure that the new home
won’t compromise or threaten your long-term financial
goals. If you have a chronic illness or medical needs,
for example, you want your income, assets and
savings to cover those costs first. Your financial
advisor may be able to help assess your
preparedness and guide your strategy to buy a
second home while keeping your long-term goals on
Count all costs: The true cost of owning a vacation
home goes beyond the purchase price and mortgage
interest rate (if you choose to obtain a loan.)
Maintenance, utilities, property and state taxes, prices
of seasonal activities, weather concerns and
insurance all change constantly and add up quickly.
Consult with a real estate agent as well as with a tax
professional as you evaluate these variables.
Investment, rental property, legacy or fun house:
If interested in this property purely for investment,
think about improvements the home may require, the
availability of skilled help in the locale and the
economic history and vitality of the community. Also,
consider how long you want to or must retain the
property to get a reasonable return on investment.
Tax implications arise if you hope to derive income
from renting your vacation home (a tax professional
can enumerate them). Renting your property may
force you to incur some additional expenses and
repairs from tenants’ damage, for example.
If you hope to simply treasure time at a second home
and escape for solitude, recreation or making
memories, the new place can potentially turn into your
retirement home. Is that attractive to you? Do you
hope one day to make your vacation home a legacy
to be handed down for generations or is your interest
Co-ownership: The more might seem the merrier
when owning a vacation home, so you can split costs,
but make sure you iron out what happens if one
owner can’t pay the agreed-upon share of expenses.
Consider forming a limited liability company (LLC),
which exempts you personally from legal and financial
liabilities of ownership. With the LLC owning the
property, details are outlined from the beginning in
case someone runs into financial trouble. Another
option may be for an individual or couple to own the
property and rent to others.
If you want to create a legacy, a trust can facilitate
passing the property from generation to generation
with the least confusion. Discord created with the
other owners may outweigh the benefit of sharing the
mortgage payments, taxes and other expenses,
Regardless of what you decide, consult an attorney to
fully understand the implications of your decisions.
When you’re thinking about a second home, your
heart and head must work together so you meet all
Your Financial Advisor: Your financial advisor can
help assess your preparedness and guide your
strategy to buy a second home while keeping your
long-term financial planning goals on track. In
addition, your financial advisor can serve as a
quarterback in organizing all your other advisors –
lawyers, CPAs, real estate professionals, etc. – in
order to gather all details, opinions and research.
So, if the warmer days of summer are enticing you to
look at those dreamy summer homes, make sure you
let your financial advisor know so you don’t get too far
Because like all financial decisions, the further out we
plan your goals, the more successful your journey.
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