Some advice — and warnings — before you plunk down that deposit on a second home.
For those of us lucky enough to consider buying a second home, we want a few things from the property. One, of course, is personal enjoyment — a gathering space for friends and families where beautiful memories are made in a relaxed, happy environment.
But the other is the knowledge that our purchase has pragmatic value in financial terms, too. In short, that we’re making a sound financial investment.
That latter issue shouldn’t be your prime motivator, cautions Grant Rawdin, president and CEO of Wescott Financial Advisory Group in Philadelphia, who says you won’t know for sure how great an investment it is until at least 5-to-10 years down the line.
“We say five years is the minimum period to judge if your second home is a good investment,” he says. “Historically, five years can put you either in the top of the bubble or at the bottom of a recession, but 10 years gives you a better look.”
Unless you’re buying the property for rental purposes, you should look at it as a lifestyle decision and plan on holding onto it for a decade, says Rawdin. “That attitude gives you the freedom to see the property both as an investment opportunity and its worth in terms of your personal enjoyment.”
Iris Segal, a realtor with Century 21 Alliance in Newtown, agrees. “It’s only a good investment if you want it for a different kind of lifestyle,” she says of the decision to purchase a vacation property. “If that’s the case, then go for it, because it will make you happy.”
Segal says she knows many Philadelphians who have second homes at the shore and in Florida. “One day they hope to be able to get the value of the houses they’re going to sell, but in some areas at the shore, the values have really come down a lot, and I’ve seen people having a very hard time selling,” she concedes.
The Northeast weather certainly influences potential buyers’ propensity to pull the trigger in sunnier locations. Rawdin adds there’s a standing joke around his office: “We say home prices in Florida have gone up 10 percent as a result of the tough winter we’ve had in the Northeast!”
If you’re purchasing the second home for your enjoyment, that personal satisfaction will help mitigate the accompanying headaches and fees that go hand-in-hand with home ownership. Rawdin, a certified financial planner who advises clients on a myriad of investment issues, cautions buyers to think about the costs of mortgage and insurance, as the latter in particular is a component that people often underestimate. “Depending on where you are, home insurance could be a sizable amount when you have to take into account storm damage, wind damage and flood insurance — so know what the current rates are and if there are any impending changes,” he warns.
That’s only the start of the costs, though. If you’re near the ocean, remember the wear and tear on your house may be more of a problem because of the salt air, so budget more for replacement costs, repair bills and landscaping fees. “The grass grows just as fast at your vacation home as it does at your primary residence,” Rawdin says.
For many buyers, a condominium will make more sense because it eliminates some of those headaches, he reasons. But with a condo comes condo fees.
The fees are more than compensated by the amenities that come with having a second home by the shore, says Carol Shaw of Berkshire Hathaway Home Services Fox & Roach Realtors. “Our buyers are very aware of the wonderful amenities the shore area has — beaches, boardwalks and restaurants. It’s not just a good investment but also a wonderful way of life here at the shore, and I’ve seen people purchase properties and hold onto them for many, many years.”
Shaw advises potential buyers to consider proximity to the beach and walking distance to restaurants and shopping to maximize their enjoyment of the property.
When clients ask Bob McVey if their second home purchase is a good financial move, his answer is an unequivocal “yes.” Broker and owner of Mann & Sons in Rehoboth Beach, Del., McVey says that over time real estate has been one of the soundest investments people have made.
“Right now we’re seeing an increase in values over the last eight quarters with pretty much every type of home, and our commercial side is starting to come back as well,” he adds. “Sure, there’s always buyer beware and you want to make sure you have a comparable market analysis before you buy, and get an inspection to make sure everything is operating correctly. But I believe real estate is a very good investment.”
Don’t let your purchase of a second home be an impulse decision inspired by falling in love with a destination on a single visit, cautions Graham O’Kelly, senior vice president of wealth management at Morgan Stanley in Beverly Hills, Calif. “A vacation property can limit your flexibility and affect other destinations where you might take a vacation, because once you’ve purchased a second home, you feel obligated to use it,” he says.
“People will argue that they can always rent it out. But a second home that you treat as a home is very different to a rental, and the way you buy a rental is very different to how you buy a primary or secondary residence.”
When his clients are considering making an investment, O’Kelly encourages them to think about liquidity. “A second home is not overly liquid and it may be a tough sell when you’re ready to put it on the market. Remember, it’s not a quick process.”
His rule of thumb for clients who want to buy a vacation home is to ask how often they plan to be at that property. “If they find themselves going there a couple times a month, they might want to consider buying. But if they’re only going there every two-to-three months, then financially it doesn’t make a lot of sense.”
South African native Lauren Kramer is a writer based in Western Canada. This article originally appeared in "Real Estate," a special secetion in the Jeewish Exponent.