If a second home is on your wish list, now may be a good time to consider making that a reality.
If a second home is on your wish list, 2021 could be a good time to consider making that a reality. Along with near record-low interest rates, there are potential advantages to purchasing a second home now, says Kelli Hill, senior director of planning at Wells Fargo Bank.
Here, Hill shares two important considerations and three key questions to ask yourself before making the decision to invest in a second home in retirement or even sooner.
Consider rental income — and what renters want
Investing in a second home now to use as a vacation home now could help you build equity over time. It also provides a potential revenue stream through full- or part-time rental income. You could even use that rental income to help cover the costs associated with the property, whether that’s maintenance and upgrades or ongoing mortgage payments. Plus, it may be easier to qualify for a second mortgage while you’re still fully employed because your debt-to-income ratio will be lower.
So what should you consider when looking for a potential investment property? The pandemic has created a surge in second home purchases in vacation areas.1 Remote work and remote learning gives people more flexibility to be away from their main home for longer stretches of time. With that in mind, high-quality Wi-Fi and home office space in your second home could help attract these long-term renters even after the pandemic subsides. That’s because some people will never want to return to the office and will want to work only from home.2
Have a plan for extra expenses
Purchasing a second home earlier than retirement can have its advantages, such as being able to spread the cost over a longer period of time during your earning years, as well as being able to enjoy your second home before you retire.
But Hill cautions that there can be a downside to purchasing a home now that you intend to use personally only later. “The longer you own a property, the greater the associated expenses will be,” she says. “It’s just going to cost more to own the property, so even if you buy it earlier to spread the cost out over the years, the overall cost itself will add up over time.” Those costs typically include expenses related to maintenance and repair, taxes, insurance, and, in some cases, homeowners’ association dues.
Renting a home to others also means you’re responsible for additional costs, such as paying for emergency repairs like a broken hot water heater or plumbing problems that renters encounter. You may also choose to hire a rental management company to handle reservations and repairs because you don’t have the time to tend to those matters yourself.
Key questions to ask before you buy
Hill says that your answers to these three important questions can help you decide if now is the time for you to consider buying a second home.
- Do you need the second home now, or do you need it later? This question refers to your planned use. In many cases, you may be happier with a second home purchase if you’re able to make use of it on a regular basis in the years before you retire.
- Can you cover additional expenses while managing other financial priorities? “A second home can be an expensive asset to invest in,” Hill says. “So you’ve got to balance your ability to finance it and pay for it with any cash flow needs you may have.” It’s important to remember that a second home is not a liquid asset, which could let you get cash in hand quickly if needed. That means you’ll want to consider having access to investments that can easily be converted to cash in case you need ready access to funds.
- What does the housing market look like now? A lot of factors play into this assessment, including housing market prices, interest rates, and housing inventory. If you’re hoping to rent your second home as a vacation property, whether it would attract renters in the long term should be considered.
“What’s the vacation rental market in the area?” Hill asks. “Is there a town or a city nearby where you can go shopping or dine for entertainment? What are the amenities in the home?”
Consider discussing further with legal and financial advisors
Because the purchase of a second home could have implications on your current finances, estate plans, and retirement goals, Hill suggests you consult with an attorney and a financial advisor. They may help you determine how purchasing a second home and any related costs might fit with your investment goals and plans.
2 Why the way we work will never be the same again after Covid, Reuters Events, October 6, 2020.