5 Pros and 5 Cons of Buying a Second Home in Retirement

Key Points

• A second home gives you a place to go when you want to escape the real world.

• It can also be a source of rental income and extra home equity when needed.

• Maintenance and upkeep costs will be ever-present -- just as in your first home.

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Whether you want a lakeside cabin a few hours from home or dream of retiring abroad, you may have begun considering whether buying a second home is right for you.

As with any financial decision, it pays to consider both the pros and cons, even if you can easily picture yourself sipping drinks from your vacation-home veranda.

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Pros

The idea of a second home can be intoxicating, and getting lost in how great it could be is easy. Advantages of a second home include:

1. A private retreat

Let's say you've done (nearly) everything right. You've spent decades working hard, built a nice retirement account, and maximized your Social Security benefits. Now that retirement is near, you want an escape, a place you can go and shut out the rest of the world. You dream of a private oasis that allows you to renew and refresh before facing the "real world" again.

2. A potential investment opportunity

If a second home is in a desirable location, it may appreciate in value over time. If it does, you'll have greater equity to draw from if you ever run into expensive healthcare issues or need funds to finance upgrades and repairs. A second home can become an additional source of equity when you need it most.

3. A potential rental property

Whenever there's a serious discussion about passive income in retirement, the subject of rental property will surely come up. While there's nothing particularly "passive" about being a landlord, renting out your second home when you're not using it can generate additional income, helping to supplement retirement savings.

4. Tax benefits

Depending on the specifics of your situation, a second home may offer tax advantages, such as deductions on mortgage interest or property taxes. If there was ever a time to double down on financial planning (hopefully, with the help of a professional), it's before plunking down money here. Before signing on the dotted line, you want to be sure that a second home provides financial advantages.

5. Personal flexibility

Having a second home to escape to opens up all kinds of possibilities. For example, if you're an avid skier living in Arizona, you can purchase a home near ski areas in a cooler climate. On the other hand, if you love your neighbors in Michigan but aren't sure you can stand one more freezing winter, you can buy a home in New Mexico or another warm spot. A second home allows you to get away to a place you want to be, and to do it on your own schedule.

Cons

No matter how enthusiastic you are about buying a second home, weigh any cons that may pop up. For example:

1. Financial commitment

A second home comes with additional expenses, including property taxes, insurance, maintenance, utilities, and mortgage payments if you take out a mortgage. Also, being unable to quickly reach that home if there's an electrical fire or flooding in the basement could cause undue stress.

2. Limited use

Whether you spend a few weeks or several months at the second home each year, you still pay for the property as though you're there full-time. There's no break on property taxes, homeowner association (HOA) fees, or basic upkeep costs just because you're away. Furthermore, you may need to hire a property manager to look in on the property when you can't, and inform you if anything needs your immediate attention.

3. Market risks

It's easy to be lulled into the belief that real estate values can only increase, and that purchasing a property is a rock-solid investment. While it's true that most real estate has slowly increased in value over time, the soaring prices that began early in the pandemic might make it appear as though there's no end in sight. But any money you put into a second home -- including a down payment, monthly payments, taxes, fees, and ongoing expenses -- can be lost if the housing market tanks.

4. Unexpected expenses

Let's say you move to an oceanside town in a state you love. The people are great, the food is delicious, and the weather could not be more perfect. However, the region is prone to hurricanes, tornadoes, floods, wildfires, or other natural disasters. With more insurance companies pulling out of high-risk areas, you may find that your homeowners insurance is dramatically higher than expected. Along the same lines, if you purchase a home in an area covered by an HOA, you could experience an HOA fee increase following a natural disaster, even if your home was not directly impacted.

5. A more expensive mortgage

If you borrow any portion of the purchase price to finance a second home, you'll find that your interest rate is higher than the rate on a primary residence. That's because lenders consider second homes riskier, and seek to protect their investment by charging a higher rate. You'll need to put down at least 10%, but you may be asked for a down payment of 20% or more, especially if you have a lower credit score or smaller cash reserves.

Nearly everything in life has positive and negative aspects. Your goal is to determine whether there are enough positives associated with a second home to make you glad you followed your dream.

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