For about the first 10 years of our marriage, every time my husband and I traveled somewhere for vacation, we would immediately start talking about how we could buy a house in the wonderous place we discovered. Whether in Lake Tahoe, Mexico, Costa Rica, or various ski towns in Colorado we’d grab those free real estate magazines and start calculating price per square foot and rental potential.
Often clients come to me interested in buying a second home or wondering if they should keep the one they have. My answer is usually no. Let’s look at a basic scenario.
Say a client wants to buy a home on the beach for $500,000. They have the 20% down payment saved and are ready to house hunt. They won’t be there full-time, so they would prefer a lock-it-and-go condo.
Here’s what they’ll be paying for:
- Annual mortgage payment: $23,000 ($400,000 loan at 4% for 30 years)
- HOA dues estimated: $6,000/year
- Taxes estimated: $2,500/year
- Utilities (AC, water, Wifi, Cable) estimated: $6,000/year
- Maintenance estimated: $1,500/year
- Walls-in Insurance Policy: $700/year
That’s just the basics and I’m sure I’m forgetting stuff. Total: $39,700/year in expenses. That’s about 8 pretty nice Air BNB weeks without the headaches of homeownership. Would you even use your own place that much?
Sure, you can rent it out to offset some of the costs, but then you are sacrificing prime weeks that your family might use the property for renters. Not to mention the wear and tear on your home and belongings. Renters aren’t super-careful with the carpet and upholstery of others.
Also, forget about ever vacationing anywhere else. You’ll feel mentally (and possibly BE financially) tied to this one location.
Last, most places that you want to buy a second home are inherently risky to homeowners.
- Florida: Sinkholes, Alligators/Python infestations, hurricanes, flooding, Floridians.
- Anywhere on a beach: Mold, floods, hurricanes, tsunami’s, earthquakes, termites
- Foreign countries: Government regulations on non-resident home owners, foreigners
- Mountains: Pine beetles, roof collapsing from the weight of snow
- All tourist destinations: Extreme volatility of home values. When a recession hits, the first thing people try to do is sell their vacation homes. When everyone is selling at the same time, prices drop. They take a long time to recover.
See, why not just occasionally rent, keep the variety in your vacation plans, AND save money.