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Preventing Second Home Dreams From Becoming A Nightmare
New costs and aggravations have put people off buying a second property . By Ben Mattlin
FOR SOME CLIENTS , A SECOND HOME MIGHT SOUND like an irresistible dream . But advisors warn that the maintenance , tax bills and insurance headaches ( if you can even get insurance ) can easily turn the reverie into a nightmare . And for retirees , second homes can turn into money pits that compromise lifestyles .
“ Many clients still flirt with the idea of a vacation property ,” says Ashley Weeks , a strategist at TD Wealth in Greenville S . C . “ However , the abrupt rise in property values , insurance costs , and interest rates have created a front-end barrier that was largely absent before the pandemic .”
Indeed , the online real estate brokerage firm Redfin recently reported that the number of mortgages for second homes fell 40 % in 2023 from the previous year and a whopping 65 % from the pandemic boom of 2021 . The declines were largely attributed to rising mortgage rates , high home prices and low inventory .
“ The temptation still exists ,” says Weeks . But these days , the costs and aggravations are preventing many clients from making “ an imprudent acquisition ,” as he puts it . “ The idea of a family vacation home is usually driven by emotion and too often justified by funny math .”
D . Vance Barse , founder of Your Dedicated Fiduciary in San Diego and Prosper , Texas , shares a similar perspective . “ Across the board , given the current interest rate environment , clients have had little to no interest in owning a second home ,” he says , adding that paying 7 % or more on a mortgage for a second home “ keeps many would-be buyers at bay .”
Hidden Costs The expenses are often much higher than clients originally anticipate , advisors say . “ The hidden costs of upkeep and improvements are often the biggest surprises [ for clients ],” says Timothy Davis of Davis Executive Wealth Management at Steward Partners in Boston . “ Many people underestimate these costs , thinking it ’ s as easy as what they see on fixer-upper TV shows , but the reality is much different .”
For example , he says , a new kitchen can easily exceed $ 100,000 . So it ’ s important to “ ensure this purchase fits into your overall financial plan ,” he says . “ It ’ s crucial to stay disciplined and pragmatic to avoid future regret .”
The ongoing costs could also impact other financial priorities , he warns . “ No one needs a second home , so it ’ s important to think it through logically .”
But others insist that the expenses alone shouldn ’ t be a deterrent . “ Proper planning can help alleviate potentially wrecking one ’ s retirement ,” says Brett Bernstein , CEO and co-founder of XML Financial Group in Bethesda , Md .
More important , he says , is to not lose sight of the potential value gained . He cited the enjoyment of using the property , the potential income from renting it when not using it , the possible appreciation of the property ’ s value , and the legacy it can leave for heirs .
54 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2024 WWW . FA-MAG . COM