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Home Buying

Should You Buy a Second Home First?

A new trend is emerging among the younger generation.  Millennials are purchasing a second home before ever buying their first.  How does that work?  Imagine you and your partner live in a major metropolitan area for work.  Your monthly rent is $3,500 for that tiny, AC-unit-in-every-window, apartment.  You’re at the point where the next big goal on life’s checklist is a home purchase (Congratulations on successfully planning for your wedding!)

However, a home purchase in the metropolitan area means your monthly mortgage payment would be $4,200 and you need to find $100,000 in cash for a down payment.  That right there is enough to make someone reconsider.  What we’ve noticed with our clients is they are making moves the unconventional way.  Why not buy a weekend home in a cheaper area, and continue to rent in the city for your work week needs?

This trend is increasing right alongside the median home prices throughout the US (see below). 

Median Home Price (According to Zillow)

  • San Francisco, CA ($1.44 million)
  • Los Angeles, CA ($753k)
  • Seattle, WA ($770k)
  • Portland, OR ($470k)
  • Salt Lake City, UT ($420k)
  • Denver, CO ($446k)
  • Brooklyn, NY ($670k)
  • Manhattan, NY ($1 million)

According to the Urban Institute, only 37% of millennials own homes today.  High student loan balances and delayed marriage have played into that statistic.  Young professionals are deterred from buying a home in the big cities coast to coast with such big price tags.  So, they go to plan B, continue renting in the city while purchasing a home in rural areas. 

Purchasing a home in a major city is an unattainable goal to many.  Millennials do not want to take on the added debt (and pressure!) of a high monthly mortgage payment.  The mathematical difference between a 10% down payment on a $700,000 home versus $300,000 is hard to ignore ($40,000 harder...).  So why wouldn’t one consider looking outside metropolitan areas for home ownership and still maintain a footprint in the city.  The trend is growing.  Here’s an interesting fact as evidence, according to the National Association of Realtors the average age of a second/vacation home buyer is now 43 compared to an average age of 61 in 2003.

It sounds very appealing to rent an apartment during the week and enjoy greater space on the weekend if you can financially support the lifestyle.  Think about it.  During the week you have access to a vibrant neighborhood with amenities such as coffee shops, restaurants, and culture.  On the weekends, you can escape to your rural home for nature, exploration, and relaxation.  With COVID-19, more millennials will be able to enjoy greater time in their second home since companies are enacting work-from-home for the foreseeable future.

If you’ve made it this far, the novelty of this idea sounds amazing, right?  So let’s review some logistics to help decide if this is a life goal for you.

Building greater home equity

Buying a home gives you the potential to experience real estate appreciation. According to Zillow, the average annual price appreciation of property is 3% to 5%.  Price appreciation leads to building greater home equity over time.  Equity is the spread between your home value and the value of your outstanding mortgage.  The greater price appreciation, the greater your home equity.  When and if you sell your home, the equity represents how much you made on the home.

Renting your property when you’re not there

Our generation created the sharing economy (Uber, Lyft, AirBnB and WeWork).  If you’re like us, then you may be interested in renting your property out on sites such as AirBnB and VRBO.  If this is a main driver in purchasing your second home, we highly recommend you research the area to understand the likelihood that the property will be rented and at what price.  Also, we recommend researching the laws and restrictions of the city in which the rental will be located in.  Yes, there are still some cities that do not allow for the use of AirBnB and VRBO.

The Internal Revenue Service (IRS) also has rules around your second/vacation home that you should consider.

  • If you rent your house for 14 days or less, you don’t have to report rental income.  The home would be considered a personal residence allowing you to deduct mortgage interest and property taxes.  Anything above and beyond 14 days would require you to report rental income.
  • If you use your house more than 14 days or more than 10% of the number of days rented (whichever is greater), it would be considered your personal residence allowing you to deduct rental expenses up until the total income earned on the property.  You are not allowed to deduct losses.

Additional costs of a second/vacation home

We hear it all the time, “I feel like my rent is just throwing money down the drain.”  You know what else can feel like throwing money down the drain?  Home expenses.  You’ll need to consider the additional costs if you stay renting in the city and purchasing a second home.  Costs such as a mortgage, property taxes, insurance, and utilities.  You also must consider the additional maintenance costs.  If something goes wrong in your apartment, you call the landlord.  If your sink starts to leak or a tree limb falls down at your new vacation home, that’s on you.   If you plan on renting your property out, are you ready to be on call for the guests?  You may consider hiring a property management team to help with the additional upkeep - remember, you’re still working your day job.  If you hire a property management team be prepared to pay 20-30% of your rental income.

What else should we think about?

I should have mentioned this earlier on, but I’ll do it now.  This topic is slightly different to think about from the debate of whether to buy a home and not continue renting at all.  If you want our insight on that topic, check out our featured blog on Honeyfi.

We are advocates for aligning your spending with your values.  Your values must be at the forefront of this decision.  What is the purpose of your second home?  Can that purpose be satisfied in other ways, or is this really the only way?  

And finally, before making the final decision, ask and answer these few questions:

 

  • Where are you accessing funds for your down payment?
  • Does your monthly cash flow support city rent and your new mortgage payment?
  • How much in additional funds do you have to cover large unexpected housing expenses?
  • Who will fix emergency home repairs during the week should you be stuck in the city?
  • How will this impact your personal life (time away from the city, upkeep on two homes, carting children back and forth, etc.)?
  • What will your employer require after COVID-19 (will they want you back in the office)?

These are important questions to ask.  


We get it, as a married couple and CFP® professionals. We’ve done it all,  rented with no outdoor space, owned a home (in the city) and listed it on AirBNB, and now find ourselves wondering if this is our next move.  If you’re looking for some help on both the personal and financial impacts of owning a weekend home (potentially as your first home!) we’ve got you covered.  If you’re not already a client of ours, our calendar is open to start this discussion with you today.

- Dan

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Dan Slagle
Founder, Fyooz Financial
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