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Nearing Retirement: Thinking of Buying a Vacation Home?

September 15, 2016
The long-term investment impact of buying a second home near retirement.

Summer is winding down, and back-to-school routines are kicking into high gear. In between all the all the hustle and bustle, you might start remembering that lakeside vacation you took just last month. It was so easy to relax and live in the moment at that beach house with a view. Back home, you decide this is the year. You want to own your own little piece of paradise: a vacation home! 

Not so fast. It may seem alluring and simple at first. After all, you could rent out the vacation home when you aren't there, right? And thanks to technology, you can even take work there and spend more time gazing at the pristine view. But before you pull the trigger on a second home, take the time to work the numbers.

Purchasing a second property is a big decision, especially for those nearing retirement. Take the time to carefully consider the potential impact it could have on your overall investment portfolio and long-term financial plan, says David Brinkman, CPA at Schneider Downs Wealth Management Advisors.

"A lot of clients assume purchasing a second property is a great investment, and for some it is. But thinking through how much time they want to spend there, how they plan to finance the transaction, and how this second property investment aligns with other financial and personal goals and objectives is the key," Brinkman says.

Here are five questions to ask yourself before signing on the dotted line:

1. How much time do you anticipate spending at this second home? If the answer is a few weeks or a few months, serious consideration should be given to renting versus owning, Brinkman says. "According to the National Association of Realtors [NAR], on average second homes are over 200 miles away for most individuals. Purchasing a vacation home comes with a lot of responsibilities and costs."

2. How is the home going to be financed? The median home price for vacation properties was $192,000 in 2015, according to the NAR. "Thirty-eight percent of those individuals paid cash for the property, while the majority of buyers used a mortgage. If paying cash for the property, consider the opportunity cost or lost portfolio income from taking the money out of an investment portfolio. If a mortgage is used, consider the cash outflow to cover monthly payments," Brinkman says.

3. If you plan to rent it out, will you be using a property manager? If so, factor this into your net income from the property, with property managers typically charging 20% to 30% of rental income as a fee, Brinkman says.

4. How could this impact your tax situation? If you plan to rent the property, determine how much time you anticipate using it versus renting out. "The length of time utilizing the property for personal and/or rental activity could have an impact on the tax treatment of the property and potential utilization of losses," Brinkman says.

5. What is the long-term plan for this second home? Brinkman asks: Is the property purchase simply for pleasure, is it a long-term real estate investment (for growth), a rental income opportunity, or is the plan to convert it to a permanent home in the future?

Run the Numbers

Create an annual cash flow budget for this proposed second home. Here's what you could include, Brinkman says:

  • Mortgage payment
  • Repair and maintenance expenses (1% to 3% of purchase as an estimate)
  • Insurance costs (be wary of higher insurance costs in flood zones or areas designated for natural disasters, and roughly 20% higher insurance costs for rental properties)
  • Property taxes
  • Homeowners’ assocation fees and other fees
  • Traveling costs to and from

There are pros to owning a vacation home, including the intangible benefit of having a property where family members can visit and create lifelong memories. And there are other possible financial benefits, including potential tax benefits for deductions on mortgage interest and real estate taxes, the potential for the property to become a retirement home over time, and potential property price appreciation. That said, taxes are a "consideration" in a financial decision, not the reason for the decision, and property values can fall.

But take the time to do your due diligence. With retirement looming on the horizon, now is not the time to leap before you look. 

Let’s Figure Out Retirement Planning

Whether you need a little guidance or a lot, we can help. Speak with a TD Ameritrade retirement consultant at 800-213-4583.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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