As a financial planner, family and friends love to pick my brain about financial topics. A trip home for the holiday season provides no better opportunity for loved ones to inquire about their retirement accounts or when they should think about taking Social Security; however, no one is more curious about the answers to these questions than my father-in-law.

As a retired accountant, he is genuinely interested in financial planning, so our conversations are usually rooted in the performance of financial markets or business in general, but this year he had something entirely different on his mind – buying a vacation home in Florida. “What do you think?”, he asked. “Should we do it?”. While he was expecting a definitive “yes” or “no”, I told him it wasn’t that simple.

Find your “Why?”

One of the most important factors involved in this decision is understanding why you would purchase a vacation home in the first place. Buying a second home as an investment property is seldom a sound investment strategy, as (historically) real estate prices have merely kept pace with inflation. For most people, the purchase of a vacation property is related to more circumstantial, non-financial decisions.

Some of us have clear visions of our retirement, and those visions may include owning a beach home to make memories with family and friends. Maybe you love warm weather activities like kayaking, biking, or golf, and would love to be able to engage in them year-round. In some cases, our health is the main driver of flying South for the winter. While the reason to buy (or not to buy) a second home is unique for everyone, a factor that must be considered, are the costs accompanying the decision.

Dollars and Cents

Before you take a long weekend in Florida to go second home shopping, ask yourself – Am I in a financial position to afford a second home? The reality is that most people are not; however, you won’t know until you put pencil to paper and run the numbers.

Outside of determining your budget, there are a host of other choices to make when embarking on this journey. Should we use cash to pay for some of the purchase? For the entire purchase? Is our investment portfolio able to withstand a large withdrawal at the beginning of our retirement? We just paid off our home of 30 years – are we comfortable taking on debt in retirement? What are the trade-offs of this decision? Does it impact our ability to have the retirement we envisioned? The answers to these questions are important, but what if you already know the answers to them and are looking for other considerations?  

A Home is a Lifelong Project

For you homeowners out there, you know what I’m talking about. Owning a home takes time, energy and finances to maintain. With a second home, you’ll be paying double property taxes, double the insurance, double the utilities, etc. Even if properly accounted for, those costs can add up to a meaningful portion of your annual budget. Most financial planners suggest having an emergency fund consisting of 3-6 months’ worth of expenses as good practice for when the furnace breaks or a loved one accidentally overflows the bathtub (sorry, mom!). If you have a second home (you guessed it), you should have a second emergency fund as well.

More than Money

Because the decision is not that simple, my in-laws are taking their time – and I’m glad. My father-in-law loves to golf, and my mother-in-law loves the beach, but they both also love to travel. A vacation home may impede their ability to do both. Not necessarily for financial reasons, but also potentially out of an obligation to return to their second home instead of seeing the other places they’ve always dreamt of. They’ve spent a few winters in Florida since they retired and have had a fantastic experience but were able to do so by renting opposed to buying. Through this process, they are weighing the pros and cons specific to them, which is most important.

If a second home is part of your retirement plan, congratulations! If you are unsure, take the time you need to feel comfortable with your decision. Whatever path you take, be sure the decision is made for reasons important to you, and no one else. In the end, that’s all that matters. Happy hunting!