Marc Ruiz of Oak Partners, Mind on Money: Think Twice About a Second Home

Marc Ruiz of Oak Partners, Mind on Money: Think Twice About a Second Home
By: Marc Ruiz Last Updated: July 16, 2018

While the stock market has been going choppily sideways, it remains near all-time highs. Unemployment is at historical lows, wages are starting to rise, bank savings are actually starting to generate a bit of interest, and the tax cut has started to make a difference in the wallets of many Americans.

I can always tell when life is good in America, because inevitably many of my conversations with clients turn to the topic of second homes.

I always have to smile to myself when these conversations come up. So often, the second home, or vacation home, topic is brought to me with a bit of embarrassment or nervousness on behalf of the client.

But as you may have discerned from reading my column, I’m not “that type” of advisor. I approach advice reflecting my belief that life's a journey. Sure, we have to prepare for the future, but in my opinion it's also imperative that we enjoy the trip along the way.

A vacation home, if handled well, can be a wonderful enhancement to the life of a family, and I’d be disingenuous if I didn’t admit that I’ve wandered into the real estate listings for Colorado, Idaho and Northern Michigan from time to time myself. So with this out of the way, let’s talk about some best practices I’ve observed over the years.

First, rarely is a vacation home a viable investment in the true sense of the word. Sure, I’ve experienced clients who have sold vacation homes for a profit after some time, but if we really added up the cost of ownership (taxes, condo fees, maintenance, etc.), I would be skeptical about how much money was actually “made” in the deal. Instead, I say view a vacation home primarily as a lifestyle enhancement, which has value in its own right. If it is sold for more money later, view this as icing on the cake.

If the “investment” part of the equation involves renting out the property to generate some cash flow, make sure expectations are reasonable. With sites like VRBO and AirBNB renting out a vacation home has never been easier, but it's important to understand all the true costs associated with this process.

With rental site commissions, increased maintenance and property management fees, rarely have I seen a vacation home become a profit center for a family. In my experience, if rentals can help offset some of the ownership costs in a second home, and if the emotional and inconvenience toll isn’t too high, this is all that should be expected.

Speaking of ownership costs, it's super important to understand all the costs and risks involved before the purchase. Homeowner Association dues, HOA special assessments, property taxes (without a homestead exemption), insurance, maintenance and utilities are often underestimated. It's not uncommon, even when a client family buys a home for cash (no mortgage), for the monthly ownership costs to average between $700 and $900.

My last piece of advice: we are all happy on vacation; that’s why they call it vacation. The timeshare industry is pretty well built on the premise of relaxed vacationers making bad decisions. Buying a second home, however, should rarely be a spontaneous event. At Oak Partners we like to encourage clients who are considering a vacation home — especially retirees — to do an extended rental (3 to 6 weeks) in the area being considered first, preferably for two years in a row. An extended rental provides time to learn the lay of the land, learn the good from the bad, and learn the local market.

Sure an extended rental can be a bit expensive, but it pales in comparison to making a bad purchase decision. And if the family just can’t find the time to spend away, then it's smart to question the second home idea all together.