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The Pros and Cons of Owning a Second Home

Listen to Best in Wealth Podcast Episode 227

Have you thought about purchasing a second home? Does it sound nice to have a place to vacation that is all yours? Do you dream of owning a Florida home or a cabin “up north?” Have you considered the pros and cons of owning a second home? Before a second home becomes part of your dream retirement, consider some of these pros and cons so you can make the best decision for you. 

Outline of This Episode

  • [1:10] Needs, wants, and wishes in retirement planning
  • [2:52] Have you thought about owning a second home? 
  • [6:00] The hidden costs associated with owning a second home
  • [7:29] Tax, lending, and insurance considerations 
  • [10:40] Would you consider renting out your second home?
  • [13:55] Will you lower vacation expenses?
  • [16:25] Will your second property steal your time? 

The hidden costs associated with owning a second home

Think about the costs associated with owning your primary residence. You will have to factor in all of these same costs when you purchase a second home: 

  • Appliances
  • Furniture
  • Cookware
  • Linens
  • Utilities (internet, cable, electric, water)
  • Down payment
  • Second mortgage
  • Property taxes
  • Insurance
  • HOA fees
  • Home repairs and improvements
  • Maintaining the yard

Even after factoring in all of the expected expenses, you have to consider unexpected expenses. What if your furnace goes out and you have to replace it? What if a storm damages your roof and you have to get it fixed? The hidden costs of owning a second home might make you seriously reconsider the idea.  

Tax, lending, and insurance considerations 

The maximum amount you can write off for state, local, and property taxes is $10,000 per year. It does not matter if you have a second home. If you have a mortgage on the property, the combined mortgage interest that you can deduct from your taxes has been reduced to $750,000.

Usually, you get better financing rates with your primary residence. Your second home might not get the best mortgage rate. Secondly, most lenders require at least 20% down to purchase a second home or investment property. 

Some insurers are completely pulling out of certain markets (such as Florida and California), so you will pay more for things like flood insurance. You need to think through these costs because these things add up. 

Can you reduce the costs of your second home?

Why not rent out your second home part of the time? That might be a way to recoup some of the costs (But keep in mind that many towns have limitations on short-term or vacation rentals). How much can you make renting out the second home? 

If you only rent out the second home for 14 days, you will not have to pay Federal taxes on that gain. If you want to rent out for more than 14 days, at $10,000 a week, your costs will still add up. It might cost you $2,000 a week to maintain the residence (mortgage, insurance, cleaning, etc.). You will also have to pay Federal taxes. 

You will also be adding more to your adjusted gross income. That could push you into the IRMAA surcharge. You might have to pay more for healthcare. You might not be able to write off other things in a higher income bracket. 

Will owning a second home equal fewer vacations?

Owning a second home might mean less travel to other destinations. Because you want to get the most use out of your second home, you might forgo other vacations you would normally have taken. But you might save money by vacationing at your second home. You will cut out hotel rooms, extra flights, etc. But do you want to cut down your travel to other destinations? Will your second house become a burden? Will your second property steal your time? Listen to the whole episode for more pros and cons to consider when owning a second home!

Resources Mentioned

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.