In years gone by, many people who had the means to buy a second home would wait until age 65 or later to make their move. But that has changed. According to the 2014 National Association of Realtors Study, nearly a third of all second home buyers are now 59 or younger. The study also gives us a glimpse of the role that second homes play in the overall real estate market. Twenty-one percent of all homes sold in 2014 were not a primary residence; a 55 percent increase from 2013.
I’m not here to talk anyone out of owning a second home, because your personal and emotional reasons for wanting another place will trump logic and hard facts every time. But whether you are thinking about finding a getaway place for personal use or investing in a rental property, you need to be aware that the hidden costs of ownership can be substantial. They may not be enough to change your mind, but they are real. One thing is clear: Once you’ve made the decision to acquire a beachfront home or a cabin in the mountains, you’ll have a vacancy rate of about 50 percent for both your primary and secondary homes, even though 100 percent of the costs will be ever-present.
The hidden costs of ownership
We generally recommend that a second home be purchased outright, without financing, due to the added expense of mortgage interest. That cost is pretty obvious, but it is eliminated with a cash purchase. Other expenditures are not so obvious, such as property insurance, homeowner’s association dues, utilities, repairs and maintenance, cleaning expenses, and if you reside in that vacation home state more than 183 days in a year, income taxes.
1) Property insurance
Property insurance has two components. One is well understood: Homeowner’s insurance typically costs $4 per $1,000 of home value. So if the value of the home is $500,000, the insurance costs would be about $2,000 annually. The second component of insurance involves whether or not the home will be rented. If the answer is yes, the premium may be up to $200 or more per month ($2,400 annually). Even if the property is only rented for six months, the cost will add up quickly.
2) Repairs and maintenance
Repairs and maintenance are a significant financial burden that most people do not consider in their purchase decision. According to an article on the website Afford Anything, a good rule of thumb is that repairs and maintenance on a home will cost about 1 percent of the purchase price every year. Again using a $500,000 home, the annual tally for repairs and maintenance could be up to about $5,000 per year.
An example of this would be the replacement of an air conditioning unit. The unit itself can run anywhere from $2,500 to $10,000 depending on the space being cooled. However, ductwork and piping and where the unit will be located (on the roof or the ground) should also be factored in. Typically, the full replacement cost will range from $15,000 to $40,000, depending on the space being cooled. Most of the cost is the labor. If you have the skills you might be able to do it yourself, but there is a value to your time, too.
3) Homeowner’s association dues
In some upscale communities, homeowner’s association dues can range from $150 per quarter all the way up to $2,500 per quarter. You may receive some services in return for this fee, including landscaping and lawn maintenance (see below), but the fee may eventually become a burden, especially if you are not living there full time.
According to homewyse.com, the cost of maintaining a backyard can be surprisingly expensive when you hire someone to do it for you. Of course, the size of the property drives everything. For example, the cost to maintain a 6,000-square-foot property could range from $375 to $900 per month.
5) The cement pond
Depending on the climate, a swimming pool (or in the words of Jed Clampett of Beverly Hillbillies fame, a “cement pond”) may almost be a standard feature. Most everybody agrees that they look nice, but is the cash outlay worth it? Cleaning, chemical application, and filter maintenance can run as much as $150 per month depending on the size of the pool and how much the owner hires others to do.
Heating a pool can also be expensive. During the winter months when most “snowbirds” migrate to their homes in sunnier climates, heating a pool is considerably more expensive. In Phoenix, for example, the monthly heating costs from October to April can range from $250 to $600 per month (depending on the size of the pool) in addition to the normal energy costs of heating the home.
6) Income tax considerations
Most states follow the 183-day rule, which says that if you have residency in a state for at least 183 days in a calendar year, it is highly likely that income taxes will be owed to that state. This means that mortgage interest, property taxes, and other issues need to be reconciled as well.
How we can help
A second home can be a place where multiple generations can come together and celebrate, and where the worries of life go away. It can be a fitting perk that complements your retirement lifestyle. The obvious costs are easy to compute, but so are the hidden costs if they are revealed to you before the buying decision is made. Much depends on the location, size, and type of residence, but all of the expenses we have discussed (and others) may be present to some degree.
Your best approach is to consider the purchase in light of a well-designed, goals-based financial plan. Buying a getaway home and its subsequent costs should be carefully weighed against your long-term goals and objectives.