Financial Planning

Primary residences and second homes can each be leveraged in different ways to help achieve financial goals. One has the potential to be an investment vehicle (generating income while appreciating in value) and the other is simply a lifestyle asset – can you guess which one is which?

Let’s explore the role both primary and secondary residences play in your plan, and what to consider when you’re looking to buy or sell real estate to avoid making financial mistakes.

Primary Residence: Is now a good time to downsize?

When building financial plans, our financial advisors consider a client’s primary residence a lifestyle asset, something you use for enjoyment, memories, and utility. It’s not expected to produce income or appreciate similar to other investments. In comparison, non-lifestyle assets are investments and income that support your spending needs.

As we move through life, our living situation changes, children may leave the nest and realize the big house has become more of a burden than a necessity. When making the decision to downsize, there are several factors to consider that may influence your decision.

• The state of the housing market. Can you find another home to move into?
• Calculate and compare expenses between your current home and a new one.
• Check if there are any tax advantages to selling your primary residence (for example, can all or some of the proceeds from a sale be excluded from capital gains taxes).

In theory, downsizing seems like a logical step; however, you should confirm that your finances will benefit from such a move. Real estate taxes, utility bills, normal maintenance, and upkeep costs will help determine when it is a good time to downsize and sell your home.

Second Home: Is owning a second home a smart financial decision?

When it comes to buying a second home, it’s essential to ask, “Is this a smart financial decision?” The following prompts will help walk through what to consider:

• The time, cost, taxes, etc. of owning a second home. If you’re using it as a vacation home, include and compare the cost of owning versus the cost of renting a couple times a year. If you’d like to offset some of the cost of a mortgage, consider renting your vacation home when you aren’t using it.
• Homes tend to be very illiquid (able to generate cash quickly). If you are in a cash crunch, it’s much faster and easier to raise cash quickly by converting investments to cash. But of course, you want to be careful about how those withdrawals may impact your plan.
• For those with a goal of owning multiple properties, it’s important to remember the risks of any investment and avoid over exposure. A good rule of thumb is to keep total real estate less than 30% of your net worth.
• Understand that if the second home is in another state, there are ways to title the home so it can transfer to family outside of probate court. Dealing with probate court can be a very time-consuming, public, and expensive process. Ensure your estate plan is in proper order by starting a conversation with a financial consultant or working with your estate planning attorney.

Those are just a few things to think about and acknowledge before making the decision to change your primary residence or purchase a second home. Whether it’s a pro/con list, ROI calculation, or cost-benefit analysis, it’s important to evaluate all options and implications.

Buying a new home is an exciting, emotional experience. Be wary of those feelings overriding your long-term goals and interrupting your financial plan. When the time comes and you’re hesitant on your decision, consult with a Financial Advisor for an unbiased perspective on your unique situation.