Should I Buy or Rent a Second Home?

In this video, the advisors discuss the considerations when buying or renting a second home, such as a vacation house. They highlight the importance of factors like liquidity, willingness to rent out the property, frequency of use, travel goals in retirement, peace of mind, financial implications, and time commitment. The decision to rent or own a second home should be based on individual preferences and goals, with a focus on peace of mind, financial discipline, and how one wants to spend their time. It’s a personalized choice that requires careful consideration of these factors.

Video Transcript

So in this video, we’re going to talk about some implications when people are considering buying or renting a second home, like a vacation house or a beach house. So Matt, when people are almost entering retirement and thinking about buying or renting a second home, what are some important things to consider?

Yeah, it’s a great question. So, very common question we get both for our active clients and our clients that are retiring as well. So for someone considering buying a home, a second home, such as a vacation home, some considerations are liquidity.

So most second homes require 25% down when purchasing the home. And one of the considerations is, are you willing to rent it out? Are you willing to put the time in to rent it out? Are you willing to hire a property manager to rent it out?

That will significantly lower the carrying cost of the house. Secondly, how often are you going to use the house? If you’re going to use the house just a couple of weeks a year and not going to rent it out, it’s going to have a significant carrying cost versus just renting a house for one month a year.

One of the other considerations that we found is for clients that own a second home, they feel like there’s an obligation to use it. Very often. We hear very lofty and extravagant travel goals for clients when they get to retirement.

And having a beach house, for example, that has a high carrying cost, not only financially may get in the way, but psychologically may get in the way of taking some of those overseas trips or exploring other areas.

So for clients that have a variety of travel goals entering retirement, we recommend to stick to status. Go try a few areas, get all of the bucket list items crossed off. When you are young and energetic, take the overseas trips, go look at what areas you like best, what areas would accommodate your schedules, and then.

From there. Once all of those bucket list items are crossed off the list, then consider buying a home in your second phase of retirement. We typically see going your go go years and then your slogo years.

And your slogo years, we found, is oftentimes a best time to purchase a second home where you have a consistent place, a place where you have all your stuff stored, where you can invite friends and family to and create long lasting memories, but just some considerations to take into place.

Purely from a financial standpoint, renting versus owning is a very individualized analysis. But surprisingly, renting versus owning, if you are renting at a lower carrying cost, investing the difference.

Oftentimes renting is actually a better financial decision despite the fact that you are wasting the money. The overall net caring cost of not having taxes, not having insurance, not having a repair cost, not having a mortgage to pay off is less than if you have a house that has a higher carrying cost.

On the flip side of that, if you have a house that’s paid off or that you’re willing to rent out and put some hard work into, the long term benefits of owning a house can outweigh that of renting a house.

But again, the three factors we would recommend to keep in mind are one, what gives you peace of mind is owning. Having a consistent place you can go to, that you can store your stuff. Does that give you peace of mind?

Or does being able to really wipe your hands clean when you leave vacation, not worrying about repairs, not worrying about what could go wrong, not worrying about potential renters, messing up your second home can be seen both ways and it’s really an individualized experience.

So will owning or renting give you greater peace of mind? Secondly, there’s the financial implications. And this is really based upon what area you’re looking for, how much flexibility you want to have in your long term travel goals.

So there’s purely a financial analysis that should go into whether renting versus owning makes sense and specifically what time frame in your life during your working years or during your retirement years that this makes sense.

And then third thing is your time. How do you want to save spend your time? And this can be seen both ways as well. Owning a house, if you don’t have a property manager, can take up more time. And the flip side, if you own a house, having stuff you have stored there, which would make your vacations much easier, you show up and it’s kind of a turnkey approach versus if you rent and it’s not yours to settle down.

So these three factors can be seen or could be debated to favor renting or favor owning. So it really boils down to know thyself, know your personal preferences, know what gives you peace of mind, know what your behavior patterns are from a financial standpoint.

Are you going to be disciplined and save the difference if you buy a second home, are you going to get the proper use out of it? Are you going to give up maybe potentially other travel goals? And then the third thing is how do you want to spend your time?

These three factors together, we believe, are a strong sounding board to make a good long term decision on whether to rent your vacation home or whether to purchase your vacation home. We are here to provide any specific analysis based upon the geographic area that you’re looking at and look forward to doing so.

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