You have worked hard your entire career, and it you are now looking to your retirement. You have braved the harsh northern winters, and 80° and the sun sounds enticing. The question remains, should you purchase a second home, or simply rent in the locale you desire to be?
We have been asked this very question on a weekly basis, and as you will see in this primer, there is not a simple solution. The answer depends on many factors that you need to think through. Our goal with this article is to get your mind churning so you make the best decision, both financially and personally.
The Personal Decision
How often do you intend on going to your retirement home each year? How many years of usage do you expect to get out of this home? The amount of time you expect to spend in this home is very important to determining whether it makes sense to begin with, both in terms of how often you intend to visit the home each year and how many years of use you believe you will get. If you foresee yourself spending several months per year at this second home, utility is high, and it may make sense to purchase a home rather than renting. However, if you intend on just spending a few weeks per year there, it may not be worth the costs for a mortgage/upkeep/property taxes (as explained below). There is also a question as to what happens as you age – do you intend on travelling to your second home, or do you want to do more travelling elsewhere? If it is the latter, it makes more sense to rent.
Your usage may not be the only reason you want to purchase a second home. Do you intend on creating a place where your family can get together in one setting? If so, this may be another reason to buy. You may also want your family and friends to have the ability to visit a singular place even when you are not there.
The Financial Decision
The main crux of this decision first hinges on whether or not you are financially independent – IE you have accumulated enough resources so that you are comfortable living your life as expected in retirement. If this is not the case, your answer is simple – save for your retirement and rent.
However, for those lucky enough to have reached financial independence, the next question is whether or not it makes financial sense. First, do you have your current home paid off? If not, how would you feel about having two mortgages? Even if you have enough resources to support two mortgages, there is still the risk of a market downturn. I would consider whether or not you are going to be able to sleep at night knowing that you have such debt.
Even assuming you can support two mortgages, does it make financial sense to purchase a second home to begin with? To make this determination, we believe it makes sense to understand your mortgage payment and compare it to the rent first, then layer on maintenance (of 1% of the value of the home for maintenance and/or assessments), insurance (case by case basis, as there is some homeowner’s insurance that is different from others – IE is there a need to insure flooding? Hurricane protection? Etc.) and finally property taxes (which can vary tremendously from 1-3% of the value of the home). As you can see, the costs of owning a second home are not simply just the mortgage, but all of these additional costs. Thus, it is not a simple analysis. If you need help, we are here for you, feel free to reach out to us!
Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors Corp.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice.
*Licensed but not practicing on behalf of Lincoln Financial Advisors.