Can you afford a second home in retirement?
Vice President, Product Manager, J.P. Morgan Wealth Management
- Thinking about that second home purchase? There are some things you should consider before you make the big decision, such as if you can afford it and how you will pay for it.
- Whether you will rent or buy your home is another decision that must be made. Renting is often less expensive for those with a smaller budget, but there are advantages to buying, too.
- If you are buying, expenses like property tax, utilities, insurance, maintenance and homeowners association dues are things you should keep in mind that you’ll have to pay in addition to the mortgage.
The sun is out, summer is here and you’re thinking, “Wouldn’t it be nice to live like this year-round?” Maybe you can – with a second home. Before getting ahead of yourself, though, there are some things to consider when deciding to add a second home to your portfolio.
Can you afford a second home?
First things first, can you afford to purchase a second home? It’s important to review your financial situation and determine whether purchasing is feasible, or if it would derail your retirement goals and investments (which we don’t want!).
Thinking about retirement?
No matter what life stage you’re at, it's always the right time to plan for retirement.
Keep in mind, in addition to the initial home purchase price and mortgage, there are other ongoing ownership costs that can quickly add up, such as property tax, utilities, insurance, maintenance and homeowners association dues, if applicable. Reviewing your retirement income (including Social Security, pension, investments, etc.) and your expenses (primary home mortgage, medical expenses, etc.) will help determine the feasibility of the purchase. This may be a good time to meet with financial professionals to discuss whether a second home is doable based on your current financial situation.
How will you use your second home?
Another question to ask yourself is, “How do I plan on using my second home?” Is it going to be an investment property (perhaps to even help pay for it), a vacation home or a seasonal retreat to split your time? If you choose to use it as an investment property, there are additional income and expense factors to consider when deciding on your home purchase budget.
Regardless of this decision, another thing to keep in mind is how maintaining a home from afar could present challenges. A condo or property management company may help alleviate these concerns but will also need to be factored in as an ongoing cost of ownership.
How will you finance your purchase?
In addition to a traditional mortgage, you may have options when it comes to deciding how to finance your purchase. Some options may include taking a home equity line of credit on your primary home, borrowing against the value of your securities portfolio or withdrawing from your retirement investments or non-retirement assets. Taking a home equity line of credit or securities-based lending could help keep your investment portfolio intact. Since there can be different portfolio and tax impacts, you should consult with a financial advisor and tax professional to review your current situation and compare the pros and cons of each option to determine which may be best for you.
What’s your decision?
If you’ve determined that you can afford a second home, congratulations! Now, it’s time to look through your expenses and income to really decide the price point that best fits your retirement lifestyle. Be sure to set a budget that keeps your other retirement goals in mind and that you can stick to before beginning your search. Be sure to keep in mind the ongoing homeownership expenses when setting your budget.
If you ultimately decide purchasing a second home isn’t right for you, don’t lose hope. You have another option: renting.
Renting vs. buying
If you’ve determined buying is out of the question, you may want to consider renting a home. Renting is often a less expensive upfront option, and you may not have to worry about many of those ongoing homeowner expenses such as maintenance and property tax.
Or, maybe you decided that you want to purchase a second home, but you’re not sure where. Renting may be a good option in this instance, too. You can choose a different location (or the same location) each visit until you make a final decision on where you want to put down roots. Imagine that flexibility!
The bottom line
Whether you choose to rent or buy a second home in retirement, it’s important to look at your full financial picture to see if a second home is feasible for you. Consult with a financial advisor and tax professional before making any major decisions or purchases.
Vice President, Product Manager, J.P. Morgan Wealth Management
