During the Covid lockdown, media often cited the growing number of remote workers dialing in from a picturesque lake or mountain house. The rosy picture these articles painted forced many Americans to ponder if purchasing a second home made sense for them. While far from a comprehensive list, we feel that pondering these considerations could help some families avoid making an expensive mistake.
Usage
Can most of the family break away for long stretches to enjoy the vacation house? If the second home is more than a few hours away, it may only be used on long weekends or during school breaks. Limited vacation time or renewed “required office face time” in a post-Covid world may make it difficult to work remotely for long stretches in another state.
Costs
Insurance: Homeowners insurance may be very different than a primary residence, especially if it is a short-term or long-term rental. In some mountain locations, fire insurance is almost impossible to obtain.
Utilities: Is it cheaper to keep a house running on autopilot while you’re gone? Some houses don’t do well when the heating or air conditioning is turned off as temperatures reach extreme high or lows (e.g. frozen pipes, cracked foundations).
Security: As second homes become more remote, security becomes a bigger need. Does it make more sense to have a security company drive by and take pictures once a day, or should a house sitter stay overnight periodically? Do you need security cameras / house alarm?
Maintenance: Basic upkeep maintenance is typically a year-round expense, as housekeeping, painting and lawn care is needed to keep the home attractive, especially for potential renters. Seasonal maintenance may also be required, such as snow clearance, gutter cleaning, and water line clearing in colder climates to avoid frozen pipes.
Vacancy: While you could rent your mountain cabin, it may sit vacant for much of the year, if not adjacent to popular attractions. The “peace and quiet” you appreciate as an owner may not make it an attractive rental property.
Travel: Don’t forget that you may have to travel long distances by plane or car to arrive at your second home; these travel costs for the entire family can add up.
Income Tax
In many states, once you meet the threshold of “six months and a day”, you can claim residency and pay income taxes in that state. However, other states you may be trying to leave behind (e.g. California) may not want to let you go, especially if some of your income continues to be generated in the state where you formerly resided. Be sure to consult with your accountant to establish appropriate expectations and avoid a nasty tax season surprise. If the second home qualifies as a rental property, many related expenses could potentially reduce overall income tax. One related expense is mortgage interest—be sure to work closely with your accountant and/or financial advisor to see how much can be deducted.
Travel Variety Limitations
For most second homes to “make sense”, they must be used for more than just one or two weeks each year. Certain families will feel “stuck” going to a singular destination (i.e. the beach house), as the family will typically have less flexibility to travel elsewhere in the world, at least until retirement years provide more scheduling options.
Rental Considerations
While collecting rental income can offset many related expenses, there are many other issues to think over. Laws related to rental properties can vary by state, city and even by neighborhood. Certain condo bylaws / HOA rules allow for renters or Airbnb-like rentals, whereas others strictly prohibit it. Renters are often hard on furniture and the home itself, requiring additional maintenance. Many owners feel more comfortable with renters if they have adequate lockable storage space for pantry items, linens, and sports equipment; make sure the house has these spaces available.
Conclusion
There are many compelling reasons to purchase a second home, especially if it is an area you know well and your family already enjoys. Please take the time to think them through, as well as consider the needs of the rest of your family, before taking the plunge. As many of you know, several of us at Sterling Financial Group have direct experience with this topic, so please consider us a resource for these issues.