Why Building a Smart Financial Plan Will Prepare You for Your Second Home

By Trey Grissom, CFP®, Branch Director, Partner, Merit Financial Advisors

If you’re thinking of buying a second home for investment purposes or for your own enjoyment, you’re not alone. The idea of a getaway or an income-generating asset is appealing for many but narrower in scope for most, with the majority of homebuyers in this bracket ranging from 45-64 years old and accounting for only 2.6% of mortgages.

Second properties are unique, involving both lifestyle and financial decision-making, thereby making it more complex than traditional investments. As such, there are many factors to consider before purchasing a second property.

Thoughtful conversations with your financial advisor at the start of your homebuying process can help guide your long-term goals in the right direction. Creating a plan that supports financial flexibility will help you achieve your goals.

How Do You Know Whether You’re Ready to Buy a Second Property?

The key to understanding whether you are ready to purchase a second property comes down to a few things. First, you must review cash flow to confirm it is stable with healthy margins and strong liquidity reserves.

Equally important, you should be on track to progress toward your core financial planning goals and have clarity about the purpose of buying a second property. Above all, be mindful you are not delaying or sacrificing your retirement goals to purchase a second property. If you are maxing out your retirement contributions and are on track to meet your goals, then a vacation home might be right for you.

Lastly, you should align this purchase with your goals and priorities for usage: will this be a true vacation home, or an investment property? If it is a vacation home, have you considered how much time you will be able to spend there to make it worth the cost, or the ability to rent when you are not there? If it’s an investment property, have you researched the popular rental months and identified local companies that can help manage the home if needed?

What Are the Advantages and Disadvantages of Owning a Second Property?

There are many advantages and a few significant disadvantages to owning a second property. There is a lot to like about owning a second property. The biggest advantages for homebuyers include potential long-term property appreciation, diversification away from stocks and bonds, and the possibility of rental income if you can list it as an investment property. Other financial advantages include tax benefits, interest rate deductions, depreciation, and long-term equity accumulation.

On the flip side, the most common mistakes include underestimating total costs for property management, repairs and additional expenses. Other mistakes I’ve seen have been overestimating the consistency of rental income and insufficient liquidity. 

The most successful formula is to purchase conservatively and be able to comfortably carry the property without relying heavily on rental income.

What Non-Financial Factors Should I Consider When Purchasing a Second Property?

The Great Wealth Transfer, in which $124 trillion in assets will shift from Baby Boomers to Millennials and Gen X over the next 20 years, is expected to impact the housing market. Specifically, a 2026 Coldwell Banker report says those two demographics will inherit $4.6 trillion in global real estate wealth over the next 10 years. This shift could result in secondary markets potentially outperforming primary markets.

Right now, higher-than-average borrowing costs are reducing affordability and shifting buyers toward cash purchases or larger down payments. That’s part of the reason why fully evaluating the property’s purpose, conducting a full cost analysis, and considering ongoing expenses is crucial.

There is also increased attention to insurance costs and the feasibility of buying in climate-prone areas. As you consider purchasing a second home, consider long-term desirability and costs, especially in coastal and wildfire-prone areas.

To be clear, people with strong balance sheets and long-term intentions are still buying, but decisions are more strategic. Coordinating your purchase with your financial advisor, lender, CPA, tax and insurance professionals is critical.

Conservative Planning is the Best Course of Action

Before considering the purchase of a second property, think about what this decision could potentially delay you as a trade-off. Does it support your long-term goals and improve or reduce your financial flexibility?

Sound financial planning, paired with realistic assumptions, will help most people avoid the common pitfalls of buying a second property and keep an exciting investment a treasured one.

Interested in purchasing a second property? First, consider whether it fits your broader financial plan. Merit Financial Advisors offers complimentary consultations to help bring clarity and structure to your financial life. Let’s start the conversation today.