Posted on: November 1st, 2020
The image of owning a second home holds plenty of allure. The idea of having a retirement getaway, a gathering spot for the whole family or a rental-income generator—and maybe all three—has lots of Americans taking the second-home plunge.
Indeed, according to the National Association of Home Builders, the total number of second homes recently topped 7 million—half of which can be found in just eight states: Florida, California, New York, Texas, Michigan, North Carolina, Arizona and Pennsylvania.
Should you join the second-home club? To answer that question intelligently, you have to look beyond the excitement that the prospect of a second home might generate and apply some careful, rational thinking.
With that in mind, here’s a look at the pros and cons of second-home ownership, and some big considerations to weigh if you’re thinking about adding another home to your life.
The first major consideration is whether to buy a second home at all. Some of the factors here include the following:
There is no correct answer that fits everyone—the right move for you will depend on factors like your goals, your family situation and your willingness to take on ownership duties for two properties.
If you think a second home is the way to go, the next steps are to consider where to buy and what to look for. Some key items that should be on your list here include:
For some buyers, a second home means a rental home. And you may be able to generate steady revenue from your property—especially if you own in an area tourists flock to year-round.
That said, this is a route that can be filled with real estate land mines to navigate. Some advice to keep in mind:
Pro tip: Ask the seller for rental receipts or ask to see the records from the company that manages the property for the seller.
Also, keep in mind that unexpected risks can materialize that may jeopardize a rental income stream. In 2020, of course, the spread of COVID-19 has caused would-be renters and vacationers across the country to cancel their plans. But even a more typical catastrophe, such as a natural disaster, could damage your rental income goals.
Of course, you don’t have to do any of those things. Management companies and other third-party providers will happily take most vacation home duties off your plate—for a price, which will eat into your revenues.
Owning a second home can be a fantastic new chapter in your life and the lives of your loved ones. It also can be a headache. Think through the many aspects of second-home ownership—enlisting the help and insights of family and trusted advisors—so you can decide the right move for you.
*Disclosure: Tax laws are subject to change, which may affect how any given strategy may perform. Always consult with a tax advisor.
|Water, water everywhere Coastal and beachfront properties are popular second-home choices. If you buy a second home in an area designated as a high-risk flood zone or floodplain, expect to have to purchase flood insurance. That said, you might find yourself in need of flood protection even if you’re not officially living in a zone that demands it. The reason, of course, is rising sea levels and increasingly volatile weather conditions. Some areas of the country on or near a coastline are seeing more intense storms occurring more frequently than in the past. So before you sign the mortgage on a house near water, consider taking these steps: |
Do some digging. Find out whether the house is in a flood zone or has had flood-related damage—which can be easier said than done, as many states don’t require sellers to disclose whether a house has ever flooded. FEMA’s flood map webpage (msc.fema.gov/portal/search) lets you enter addresses to see whether homes are in a flood zone. But since those zones aren’t always updated regularly and may not reflect new realities due to climate change, go a step further: Talk to people living in the neighborhood you’re considering about the frequency and extent of weather-related damage they’ve experienced.
Add up insurance costs. Traditional homeowners insurance doesn’t typically cover flood damage, so it’s up to you (with the help of a trusted advisor) to locate the right coverage for your needs and do the math to see how much it will cost in total. The time to know what is covered (and what isn’t) and how much that coverage will set you back each year is before you buy—not after.
Learn when and how the house was built. Houses in Florida constructed before 1992’s devastating Hurricane Andrew generally weren’t built to withstand major storms as well as newer homes can. If you’re buying an existing home, learn what materials were used. Insurers in hurricane hotspots give credits for newer construction, impact-resistant windows and doors, and other upgrades. Therefore, a newer residence may be a better value in the long term due to the reduced cost of insurance. Always try to find out the cost to insure before a purchase is made.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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