Is Buying a Vacation Home a Good Retirement Investment?
You have your heart set on the perfect vacation home for your retirement. Whether the home is overlooking mountain pines or ocean tides, you might see the destination as a place to get away, to host your family and friends, or rent it out for income when you’re not using it.
But is buying a vacation home a good retirement investment? Before you place an offer on that dream getaway, consider the following points to help make sure a second-home purchase is right for you.
Start with Your Finances
Whether you are nearing retirement or are already retired, your retirement nest egg is of paramount importance. Any purchase you make, including a second home, should never put your savings at risk.
If you would have to draw from your retirement savings to make a down payment on the vacation property, you may want to forgo buying the house.
If you do have the money available, it could be a green light, especially if you’ve already paid off the mortgage for your primary residence.
Sit down with your budget to determine how much of a mortgage you can afford. And remember: It isn’t just mortgage payments that you need to cover. You face all the expenses of a primary home, including:
Property taxes
Homeowner association fees
Utilities
Maintenance and repair costs
Insurance
If you want to use your home as an Airbnb, you may need to hire a property management company, house-cleaning service, landscaper, and so on. Those costs will take a bite (perhaps a considerable bite) out of any income you make from that home.
Decide How You Will Use the Vacation House
While you are assessing your finances, determine how you will use the new home. If it is for personal use, make sure you and your partner are on the same page about buying it. You may dream of sitting by the same strip of beach year after year, but your spouse may prefer to vacation in a different location every year.
The same goes for your family. Your grown children may have different ideas about family vacations, and a change like a cross-country job promotion could mean they don’t make any such vacations for a while.
Grandchildren, too, may have other activities, like summer camp, that you should consider if you see this house as a hub for family gatherings.
And what if you’re considering investing in a vacation home for its rental potential? You’ll want to determine the extent to which your finances will depend on the income.
Ideally, your rental income will supplement an already stable cash flow. You don’t want something like a pandemic-caused shelter-in-place order to eliminate the rental income you need to stay afloat.
Also, keep in mind that some tourist destinations have peak seasons. If you need the income, you won’t be able to enjoy the home at the ideal time of year. Consider the balance between income and personal use that is acceptable to you.
Take the time to understand the tax impact for how you plan to use the property—for example, personal residence versus vacation rental, or mixed-use. And if you’re confused about how your decision will affect your personal finances, consider talking with a fiduciary, fee-only financial advisor.
Our Registered Investment Advisory firm in Greenwood Village, Colorado, works with clients to help determine how a second home fits into their retirement plan.
Determine Your Long-Term Plans for the Second Home
If you have long-term plans for your home, you’ll be in a better position to capitalize on its growth potential while minimizing the tax impact, which could be significant.
The IRS treats vacation homes differently from primary homes, and there is no capital gains tax exclusion when homeowners sell second homes.
One potential workaround is to sell your primary home and move into the vacation home. After you meet the IRS requirements, you could then sell the vacation home as a primary home.
If you don’t see holding on to your vacation home for at least five years, the costs in purchasing, maintaining, and selling the residence may outweigh any benefits, financial or personal.
You might find that renting a vacation home is a better option. You’ll be able to enjoy time in your desired destination without the costs of homeownership—which could make for a carefree vacation indeed!
Final Thoughts
As you comb through Zillow or Redfin for your dream vacation home, take time to double-check your budget to make sure the numbers work. You’ll want to account for how you plan to use the residence and how long you want to own it.
If you’re uncertain about your decision, consider talking with a financial advisor who can help you make an informed decision in light of your entire financial situation.
Happy house hunting!
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This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
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