8 Things To Consider Before Buying That Second Home For Your Retirement
By David Rae, Contributor
Sept. 1, 2021
With the stock market seemingly hitting new record highs every day and mortgage rates near record lows, you may be wondering if you should pick up a second home for your future retirement. Perhaps, a vacation home you can enjoy now while you wait for the day you reach financial freedom and decide to end working full-time.
I recently spoke with a gay couple looking to pick up a second home in Palm Springs, with the idea they could retire there in the next few years. They can afford a lovely home now but could afford a fantastic home if they wait until they are retired.
I walked them through the topics below, and we also reviewed what this meant for their other travel plans. I wanted to make sure this wasn't a Covid purchase that they would regret. They love to travel often and to travel well. With Covid lockdowns, well, they felt their wings had been clipped. Ultimately, they realized that they would instead put the money they would have used to buy in Palm Springs towards future travel before and after retirement in the short term. They have a fantastic travel bucket list. The couple decided that renting a great home when they want to get away to Palm Springs would be the best decision in the short term. Longer-term, they still plan to retire to Palm Springs but will wait a bit to buy their next forever home there.
This couple isn't alone in asking about buying a second home or even a vacation home. According to the National Association of Realtors, second home sales were up more than 44% year over year in 2020. An estimated 45% of vacation home buyers are in their 50s and 60s and buy for personal use. A good number of my Los Angeles financial planning clients also own a second home in Palm Springs. Some rent their places out; others don't.
Before you pull the trigger on a second home, don't forget about all the ongoing ownership costs. Beyond the mortgage, you have taxes, insurance, utilities, maintenance, repairs, furniture and often a homeowner's association.
Where Do You See Yourself Retiring?
Suppose you are like me; you have probably seen a few (million) episodes of House Hunters International. Your favorite international vacation destination may hold some fond memories, but it may not be the best place to buy a second home and may not be your ideal spot to retire.
Think About Your Priorities in Retirement
How do you plan to spend your retirement days? The peace and tranquility of a mountain cabin may sound incredible, but if you always want to travel in retirement, is there an airport reasonably close? Is it a major airport or a regional airport? Regional airports likely mean more layovers and more time traveling.
Can You Get Adequate Medical Care?
As we age, most of us utilize more health care services. Being near hospitals or your doctors, in some cases, can be the difference between life or death. It may be even more apparent if you have a medical condition that requires the care of a specialist or regular visits to a medical provider.
Could You Live in the Home Long-Term?
Someone I know purchased a three-story home on the Balboa Peninsula in Newport Beach. It was a cute place by the water; the problem was the living room was upstairs. After the first knee replacement, getting upstairs was a chore. After a second knee replacement, climbing the stairs was nearly impossible. Forget trying to carry groceries up the stairs. Can you age in the home? Is there a bedroom on the first floor?
Could You Earn Additional Rental Income from the Property?
If you buy a home ahead of retirement, could you earn rental income before moving in full-time? Is this a tourist spot or vacation destination? Are you willing and comfortable renting out the place?
Clients of mine decided to buy somewhat of a fixer house (in their opinion). Then, they rented out the home and saved the rental income they received for the eventual remodel before moving in during retirement.
I would caution you to avoid splurging on a house you likely can't afford under the guise of rental income. Management companies can cost you 20-35% of your gross rental revenues.
Visit Your Retirement Locale in Every Season
Fire Island may be unique during the summer season, but I think it would be quiet and lonely during the winters. Similarly, Palm Springs is excellent, say ten months a year, but for two to three months per year, you might as well be living in Death Valley or Phoenix, when the temps can reach the 120s. It is dry heat, and you will likely have a pool, but still.
Consider renting for a few months or even a year to see how you like the location off-season or during different parts of the year. If you aren't sure you want to be here full-time (or permanently), there is nothing wrong with renting until you make a final decision.
How Often Will You Be Able to Visit?
If you live in Los Angeles (or Southern California , for that matter), you can pop out to Palm Springs or the mountains for a quick weekend. If you buy a place across the country or even on another continent, it may be hard to pop in, mainly if you are limited to two to three weeks of vacation or have kids still in school.
Once you are retired, this may not be much of an issue, but if you are purchasing a home before you retire, this could limit the value of owning a home at this time.
Are These Your People?
Have you ever lived in this part of the country or world? Will you get along with the locals? Let's be honest. Moving can be a culture shock. There are many things you may take for granted where you live that won't be the same elsewhere. As a gay financial planner who works with racially and ethnically diverse clientele, there are parts of the country where a sense of community and even feeling safe are more obtainable.
Would You Be Happier Just Renting and Vacationing There?
Would you get more joy and use out of just renting a place when you wanted/needed it? If you are there infrequently, you could probably spend significantly less by renting a fabulous house? A friend rented a place for a year in a vacation hot spot. He said he could have rented the presidential suite and ordered Dom Perignon at the trendiest hotel in town for the number of nights they used it. On the flip side, I know many snowbirds who get a ton of value spending time at their second homes in warmer climates.
The bottom line is to make sure you can afford the second home without putting your retirement security at risk. Take the time to ensure you will enjoy living there for the long term. Who doesn't love sitting on a beach in Maui? But as we saw in White Lotus, even the most amazing resorts can't make everyone happy. No place is perfect, but some locations may be terrible for you and your specific needs and preferences, depending on your retirement needs.
By David Rae, Contributor
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