It’s not unusual for clients to want to buy a second home. They may crave the Sunbelt, or a mountain retreat. But owning multiple homes can create a host of logistical and financial complications.
“It’s critical to completely understand the risks and responsibilities,” said Megan Slatter, a wealth advisor at Crewe Advisors in Salt Lake City.
Exploring Why
Why someone wants to buy another home is the first and perhaps most crucial question, advisors said. What’s the purpose, the goal?
In recent years, low mortgage rates helped fuel a surge in homebuying. Now the Zoom revolution has opened up more options. “Technology has enabled clients to efficiently work from wherever they like,” said Jere Doyle at BNY Mellon Wealth Management in Boston.
A second home can also be a gathering place that “brings grown-up children together for memorable experiences,” he said.
Whatever the case, “be honest about why you are buying and what the real cost of owning is,” said Jeff Silverman of Summit Group of Virginia, an Alera Group company in Virginia Beach, Va. “So many clients rationalize their purchase only to end up regretting the decision or losing financially.”
If clients try to justify a second home by the rental income it can generate, they’d better be prepared for the consequences, he said. “As soon as you rent, it’s no longer a second home—it’s an investment property, which is a completely different animal.”
But there are success stories. Timothy Davis of Davis Executive Wealth Management, a Steward Partners firm in Boston, owns several homes and rents them out when not there. They generate just enough income, he said, to make up for the costs of insurance, taxes, and maintenance—though they are not exactly profitable.
“Remember, just breaking even is a win because it in essence gives you a free second home,” he said.
Location
The next key concern is location. Quiet and remote might sound nice, but the place must be convenient, advisors cautioned.
If it’s much more than an hour away from the primary residence, said Doyle, you’re likely to want a local caretaker. If you plan to stay there for months at a time, it should be near enough to essential services—including medical facilities, he said, which become increasingly important with age.
And don’t forget about guest parking, Doyle stressed. “It’s often overlooked, but extra parking adds considerable value to a vacation property,” he said.
There are other location issues to keep in mind. Lori Van Dusen, CEO and founder of LVW Advisors in Pittsford, N.Y., owns a place on the Florida coast, which had to be rebuilt after Hurricane Ian in September 2022. In areas that are susceptible to hurricanes, wildfires, or other natural disasters, she found, home-restoration contractors and homeowners insurance are scarce. “You have to be ready to self-insure,” she said.
Local laws might also impose rental restrictions or govern inheritance rights after the owner’s death. Such legal entanglements can be particularly unnerving in a foreign country. Van Dusen once had a home in Costa Rica, where “there are squatter’s rights laws,” she said. “We had to actually hire someone to live on our property when we weren’t there to protect it and maintain our right of ownership.”
Affordability
Naturally, affordability is another vital concern. “If owning a second home puts the buyer’s financial stability at risk, it’s probably not a wise decision,” said Jaime Eckels, a partner at Plante Moran Financial Advisors in Auburn Hills, Mich.
The second home “may lead to a reduction in overall net worth,” said John Campbell, head of wealth planning and trust services at Calamos Wealth Management in Chicago. It could, in turn, cut into plans for “generational wealth transfer and philanthropic gifts.”
That’s because purchasing and maintaining a second home takes funds out of retirement capital. “[You’re] putting it into an illiquid, non-diversified asset,” said Steve Parrish, St. Augustine, Fla.-based co-director of the American College of Financial Services’ Center for Retirement Income. “If this results in a retiree’s portfolio being property rich and investment poor, it may make more sense to use a long-term lease for the second residence.”
F. Michael Zovistoski at UHY Advisors NY in Albany, N.Y., concurred. “Real estate is not a highly liquid asset,” he said, “meaning it will take time to convert into cash, should the need arise,” he said.
It also complicates estate planning, he said, since “each state is looking to exact their fair share of estate taxes from their high-net-worth residents.”
Becoming A Landlord
To be sure, clients might think that the expenses can be offset by rental income. They should remember that renters put extra wear-and-tear on a property—which can give homeowners a costly headache, advisors said.
“Be sure to set clear boundaries and expectations with tenants,” suggested Loren Fellows at Johnson Financial Group in Janesville, Wisc. Have them sign a formal agreement that “addresses accident and damage liability,” she said, and be sure to review any homeowners association rules regarding tenancy.
Some advisors recommend owning the property in a limited liability company. “This will minimize personal exposure to lawsuits,” as Calamos’s Campbell put it.
Naming A Primary Domicile
Legally, you must designate one home as your “primary domicile” for tax purposes. This means documenting that you spend more than half the year there.
“If clients sell a home they’ve lived in as their primary residence for at least two out of the last five years, they can exclude up to $250,000 of any gain on the sale, or $500,000 for couples who file jointly,” said Ben Ramsey at Crestwood Advisors in Boston. “But the tax exclusion does not apply to vacation homes or other types of second homes.”
Some snowbirds spend just enough time in places like Florida to “claim it as their primary residence and save on state income taxes,” observed Eric Sweeney at Steward Partners Global Advisory in Boston.
But it might not be easy to get those savings. “If you still have earned income from a business in a place like New York, as I do, you have to delineate which income comes from where,” said LVW’s Van Dusen. “You’d better have a good CPA.”
Leasing Vs. Owning
Before making a commitment, some recommend leasing a second home to try out the lifestyle. “Many retires … have only visited in the peak season,” said Erin Wood of the Carson Group in Omaha, Neb. “Having a long-term rental allows you to test out other seasons.”
Leasing may even prove good enough. “It generally requires less immediate cash outflow,” said Harold Evensky of Evensky & Katz in Miami and Lubbock, Texas, “[and] it doesn’t tie up as much capital [as buying].”
Leasing also provides more flexibility and less responsibility, he continued. Then again, owners can build equity and enjoy the freedom to customize the property. Their mortgage interest and, in some cases, property taxes can be deducted, too, unlike lease payments, he said.
Those who favor ownership insist that it can be a good investment. A second home “allows for diversification across different real estate markets,” said Rodrigo Faro, CEO of Brainvest Wealth Management in Miami.
He has clients who look for second or even third homes in Mexico, South America, or the Bahamas, he said, where they often find better bargains.
Still, owners should always have an exit strategy, said Dean Catino, president of Monument Wealth Management in Alexandria, Va., “in case the second home doesn’t suit your future.” A second home, he said, “should enhance your life, not complicate it.”
