The Real Cost of Owning a Second Home in Retirement

The Real Cost of Owning a Second Home in Retirement

Retirement is full of wonderful possibilities. When you don’t have to show up at the office, you can spend your days just about anywhere you please.

Maybe you’ve always pictured yourself at the beach or in the mountains. Or perhaps you’ve just been dreaming about being closer to family. So why not own a second home to allow you to visit comfortably anytime you like?

While owning a second home is the dream of many retirees, there are significant costs to consider before you sip that mai tai, breathe in the crisp, evergreen air, or pick your granddaughter up from school each afternoon.

Unpopular Truth: Owning a Second Home is NOT an Investment

This may not be what you want to hear, but we need to get this fact out of the way first: Owning a second home is not an investment. It is a want, and a want that very few can actually handle from a financial and emotional standpoint.

You see, a second home is not an investment because an investment is something that pays you money for assets invested in it. Since you don’t earn money for owning a second home, it is not an investment. Owning a second home costs you money, not the other way around.

Financially speaking, owning a second home is a liability. It ties a significant portion of your net worth to the volatility of the housing market and constantly requires more of your income each month and each year to keep it up and running. It is not a productive asset.

Now, that doesn’t mean it should be avoided at all costs. It does mean, though, that you need to ensure (1) you are financially on track for a long and fruitful retirement before you purchase a second home and (2) that the extra risks, liabilities, and expenses involved in owning the second property will not derail your other major financial plans.

Real Cost #1: You May Have to Decrease Your Lifestyle (or Work Longer)

For many investors, owning a second home comes at a cost, and not just the financial costs. Owning a second home increases your standard of living, which means you will need more money each month to retire. One way to handle this is to live on less—that means cutting expenses to make room for the costs of the second home. Or, it could mean you work longer and retire later to earn the extra income you’ll need to be able to afford this liability.

Real Cost #2: Lost Investment Opportunities

Money spent on a second home is money that could be put to work earning more money if it were invested. Your down payment, your monthly payment, your taxes, insurance, utilities, HOA fees, maintenance fees, etc. are all dollars that could have been earning an annual return and compounding to build wealth. No matter your income level, the costs of a second home detract from potential investment gain if the money were allocated another way.

Real Cost #3: Renting Doesn’t Pay What You Think

Perhaps you’re thinking you can offset some of the costs of owning a second home by renting it out. This sounds easy enough, but renting comes with extra costs too. If you rent more than 14 days per year then you are considered a landlord. Yes, being a landlord does come with some tax breaks, but also some liabilities. Make sure you do the math beforehand to see which direction the scale favors.

Renting out your property also means extra insurance, cleaning, maintenance, and saving for replacements when things inevitably break. You may even need to hire a property manager to tend to your guests when you cannot.

Renting out a property is running a small business. You’ll spend hours a week—or thousands a year—to keep it running and complicate your tax picture in the process. First, consider the time cost of renting. The hours per week you will spend managing the property could translate into weeks per year actually vacationing. Sure, planning a vacation takes some time, but not anywhere near the amount of time it will take you to run the rental business.

Weighing the Relative Merits of the Second Home

At the end of the day, whether you readily have the income to invest in a second home or not, the final decision to make is if these “real costs” are all worth it. There is no right answer, of course. Your retirement dreams are yours alone and you should, of course, do what you can within your power to make those a reality. It’s just as important that each individual or couple weigh the relative merits with these less frequently discussed costs to decide if owning a second home will really work for you.

Need Some Help?

The advisors at Uncommon Cents Investing are here to guide you. If you’re interested in learning more about our wealth management services, simply schedule a call.

More About the Author: Sheena Hanson