Whether you’re interested in buying a condo in your favorite vacation spot or are interested in rental income, it’s critical that you consider how the purchase fits into your lifestyle and financial picture. Owning a second home can seem glamorous and potentially offer you another source of income, but it can also be a time and money pit. Whatever your reasons for considering another property, here are some factors to consider before taking the plunge.
What is the purpose of the property?
If you’re primarily interested in a vacation home, make sure that it’s in an area that you visit regularly and know well. Make sure that you and your family will still be interested in using the property five, ten, or even fifteen years down the road. If you’re not committed to spending a significant part of each year at your vacation home, renting might be a simpler and savvier option.
Though many owners rent out their vacation homes to defray the costs of ownership, peak rental season often coincides with the best time of year to visit. If you’re not willing to plan your vacations around renters and forego some use, the income potential of the property will be limited.
What is the hassle factor of managing the property?
Don’t underestimate the work involved in buying, renting, selling, and maintaining a property. The hassle will be even greater if you live far away since you’ll need to find someone to keep tabs on the home when you’re not there. Though property management firms can help you find renters and maintain a property, it may be unwise to rely on them for everything.
Remember that the life of a landlord isn’t always romantic. If you’re not able to handle routine maintenance or take midnight plumbing calls, you’ll have to budget for professional help. Many holiday home owners spend a significant part of their “vacations” on routine upkeep and chores.
If you’ve never dealt with a rental home or vacation property, ask around for advice. Friends and acquaintances who maintain properties can be a gold mine of knowledge. Asking them about their experiences can help you refine your plans and avoid expensive mistakes.
What are the nitty-gritty details?
With real estate, it’s vital that you completely understand the fine print. You’ll need to keep a close eye on the total cost of ownership, including purchase price, financing costs, maintenance, fees, property taxes, insurance, utilities, and the cost of furnishings. Add some “fudge factor” into your calculations for unanticipated expenses.
If you’re planning to rent the house, be very conservative in your income estimates to make sure that you can cover the overhead if the property remains vacant for a lengthy period. Speaking with other property owners and checking rental listings can help you get a better idea of what the rental prices and occupancy trends in the area might be.
What are the risks involved with the property?
As with any purchase or potential investment, you need to carefully consider all the potential risks. By committing a significant portion of your savings to another property, you’ll be giving up other purchase or investment opportunities. You may also end up foregoing annual trips abroad or other lifestyle choices to maintain the property.
The major drawback of real estate is its lack of liquidity. Unlike stocks and bonds, physical properties cannot be easily sold, potentially leaving you stuck with the asset (and its costs) longer than you anticipate. Your decision making process should factor in worst-case scenarios like higher annual costs, lower rental income, bad tenant expenses, and falling real estate prices to make sure that you can afford to keep the property.
There is also no guarantee that your property will appreciate in value while you own it. As many homeowners learned during the mortgage crisis, properties can lose value rapidly and become difficult to sell in a down market. Rental income can offset some of the carrying costs of a property, but it’s wise to consider many possible scenarios when evaluating the purchase.
Ultimately, the decision about whether to buy a vacation or rental home depends on many financial and lifestyle factors. What’s most important is that you don’t jump into a purchase without carefully running the numbers–ideally with the help of a professional who can take a look at your entire financial situation. Though real estate can offer advantages, it’s vital to think about how another property fits into your overall financial and life goals. Call us at 913.814.3800 and we would be happy to help you determine if this avenue is right for you.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Originally published on February 14 2017 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.