Many South Floridians head for summer vacations in their favorite U.S. or overseas destinations. Whether you enjoy the cool mountain air, the warm sun of the beach or a family-friendly trip to a theme park, one question to consider is whether to invest in a vacation home.
Before making that decision, it’s important to look at several lifestyle and financial issues. That’s because everyone’s situation is different, and the right choice for your neighbor or friend might not be the best one for you and your family.
First, let’s look at the lifestyle aspect. How often would you use a summer (or winter) vacation home? If you are nearing retirement age or can work remotely, for instance, you might be able to spend several weeks or months a year at your second home. On the other hand, if you need to go into the office every day to manage your business or assist your clients, you might not be able to break away more than a week or two every year.
Another issue is whether or not you want to tie yourself down to a particular location year after year. If you buy a second home, you’ll probably wind up spending your vacations there, rather than varying your destinations. For someone easing into retirement, that can be a great way to get to know the area and the people in a new community.
You might also want to look ahead to the next five or 10 years to see if your vacation preferences might change. You might have children who love going to the theme parks with their parents, but that might change when they go off to college and start their careers. A vacation home in a family-oriented location, though, might be an ideal choice for seniors who want to spend quality time with their children and grandchildren.
If you’re not sure you want to commit to the same destination, you might want to look at other options, such as internal ownership or time-sharing. Basically, you purchase the right to occupy a vacation property for a week or two every year. One of the benefits is that you can usually exchange your interval with a property in a different location, providing some variety from year to year.
Just be sure to read any interval ownership offering carefully before signing a contract. You should understand the fee structure and your responsibilities, just as you would before signing a rental agreement for a vacation home.
The financial issues
Before making a decision to buy a vacation home, you should talk with your financial advisor about your current assets, liabilities and investment portfolio. If you have already built a “rainy day” fund to cover immediate household expenses and a significant retirement fund, buying a vacation home might enhance your lifestyle without upsetting your financial situation.
If that’s not the case, you probably should think twice before tying up a major portion of your savings in a vacation home. Unlike a savings account, money market fund, stocks or bonds, a real estate property is a relatively illiquid asset. It might take weeks or months to sell your second home. If you need money for a financial emergency, you might also be forced to sell immediately by reducing the price below your home’s current market value.
However, you may have options for financing the purchase, such as taking out a mortgage loan rather than paying all cash. If you are getting a mortgage, you don’t have to dip as deeply into your savings. Of course, you will have a recurring loan payment.
That’s just one of the typical ongoing costs of owning a second home. What are the monthly utility bills? Is there a homeowners’ association or condominium association fee? If so, are the other residences in relatively good shape, or is the association likely to impose a special assessment in the near future to pay for aging roofs, rebuilding a clubhouse or other purposes?
Caring for your home
Maintenance is another issue to think about before making a decision to buy. Who will take care of the home while you are staying there or during the rest of the year? Talk with current homeowners during your next vacation stay for recommendations about service providers.
It’s also a good idea to check the community’s land use and zoning plans. If you’re buying a mountain villa, for instance, you don’t want developers to build a tall structure that blocks your scenic vista.
You should also think about whether or not you want to rent out your vacation home when you’re not in residence? That could generate income and cover some of your monthly costs and fees. However, that would mean having strangers living in your home, raising insurance issues such as property damage, theft, or personal injury liability.
You would also need to hire someone to lease and manage your property as a rental. Finally, be sure that short-term rentals are allowed in the community before you base your decision on that projected income.
Because buying a second home is a major decision, you should discuss these issues with your family members and financial advisor. Take your time, and look at the big picture before deciding what’s best for you.
Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.