Preventing The Second Home Dream From Becoming A Nightmare

Christopher Demarest |

For some clients, a second home might sound like an irresistible dream. But advisors warn that the maintenance, tax bills and insurance headaches (if you can even get insurance) can easily turn the reverie into a nightmare.

“Many clients still flirt with the idea of a vacation property,” said Ashley Weeks, a strategist at TD Wealth in Greenville S.C. “However, the abrupt rise in property values, insurance costs, and interest rates have created a front-end barrier that was largely absent before the pandemic.”

Indeed, the online real estate brokerage firm Redfin recently reported that the number of mortgages for second homes fell 40% in 2023 from the previous year and a whopping 65% from the pandemic boom of 2021. The declines were largely attributed to rising mortgage rates, high home prices and low inventory.

“The temptation still exists,” said Weeks. But these days, the costs and aggravations are preventing many clients from making “an imprudent acquisition,” as he put it. “The idea of a family vacation home is usually driven by emotion and too often justified by funny math.”

D. Vance Barse, founder of Your Dedicated Fiduciary, an affiliate of Commonwealth Financial Network in San Diego and Prosper, Texas, shared a similar perspective. “Across the board, given the current interest rate environment, clients have had little to no interest in owning a second home,” he said, adding that paying 7% or more on a mortgage for a second home “keeps many would-be buyers at bay.”

Hidden Costs
The expenses are often much higher than clients originally anticipate, advisors say. “The hidden costs of upkeep and improvements are often the biggest surprises [for clients],” said Timothy Davis of Davis Executive Wealth Management at Steward Partners in Boston. “Many people underestimate these costs, thinking it’s as easy as what they see on fixer-upper TV shows, but the reality is much different.”

For example, he said, a new kitchen can easily exceed $100,000. So it’s important to “ensure this purchase fits into your overall financial plan,” he said. “It’s crucial to stay disciplined and pragmatic to avoid future regret.”

The ongoing costs could also impact other financial priorities, he warned. “No one needs a second home, so it's important to think it through logically.”

But others insist that the expenses alone shouldn’t be a deterrent. “Proper planning can help alleviate potentially wrecking one’s retirement,” said Brett Bernstein, CEO and co-founder of XML Financial Group in Bethesda, Md.

More important, he said, is to not lose sight of the potential value gained. He cited the enjoyment of using the property, the potential income from renting it when not using it, the possible appreciation of the property’s value, and the legacy it can leave for heirs.

“Making memories in a second home with your friends and family is priceless,” he said.

Other Considerations
Legacy is hard to predict, though, as other advisors point out. Keeping a second home in the family “can be a challenge,” said Don Grant at Sabre Wealth in Wichita, Kan. “The house on the lake that was once a one-family home is now being used by several kids with several grandkids.” The home can become a “point of contention,” he said. Some heirs might not want to maintain the property or can’t.

Also, if the second home is left unoccupied, squatters might move in. “Every state has different laws regarding squatters, [but] it’s possible that the landowner could lose ownership,” he said. He recommends installing security cameras and staying cognizant of local laws.

Location can also make a huge difference, advisors say. In many areas, hurricanes, wildfires and other disasters have pushed homeowner insurance premiums to rise faster than inflation. The bill for a policy renewal can jump 20% or more. In some places, it’s impossible to buy a policy at all. State Farm and Allstate Corp. stopped issuing new policies in California several years ago. Farmers Insurance Group ceased offering new home coverage in Florida and canceled many renewals. American International Group (AIG) has limited its coverage in certain ZIP Codes.

“Double-digit increases in insurance premiums have become a significant pain point for all households, regardless of their net worth,” said Barse.

Another reason there’s possibly less interest in owning multiple homes “is that fewer people are working fully remotely these days,” said Salvatore Capizzi at Dunham & Associates Investment Counsel in San Diego. “It was one thing when you could work from your dream vacation home all week long. But the thrill of the second home getaway does not seem to sparkle quite as brightly when you have to battle traffic and return to the office routinely. The dream may have started feeling more like an expensive headache.”

Steve Parrish, professor of practice and scholar in residence at the American College of Financial Services, agreed that many clients don’t think about “the hassle aspect,” as he put it. “They find that shuttling back and forth is bothersome [and] takes them away from friends. Sometimes the new place just doesn’t feel like home. … Need to see your dentist? Oops—wrong location. Looking for that favorite book to reread? It’s stored in the other place.”

Steven Podnos at Wealth Care in Cocoa Beach, Fla., is all too familiar with that feeling. He and his family own two homes—one on the beach and another on a river, he said. They are 20 minutes apart, a proximity he recommends. "You’re much more likely to use it [if it’s not too far away],” he said. “We use both of our homes every week. When we owned a vacation home in the past [that was] three hours away, we used it rarely.”

Sound Strategy
Still, despite the hassles and expenses, some advisors contend that buying a second home can be not just pleasant but part of a sound strategy. The location could ultimately become the client’s primary residence, said Daniel Forbes at Forbes Financial Planning in East Greenwich, R.I. “You’re simply buying your retirement home early, and you get to enjoy it while you’re working and still have a steady income,” he explained.

“Owning a second home can be a good idea for those who are financially independent and want to diversify outside of traditional investments like bonds and stocks,” said Jaime Eckels at Plante Moran Financial Advisors in Auburn Hills, Mich.

But always be sure to exercise caution before taking the plunge. “Rent before you buy,” suggested F. Michael Zovistoski at UHY Advisors NY in Albany, N.Y. “Check out the neighborhood, climate, amenities and other items that you would not otherwise find out from a realtor or the local chamber of commerce.”

Such preparation will take time, he acknowledged, but it’s prudent. “Understand the good, the bad and the ugly by talking to people in the community you are considering joining,” he said. “Don’t rush into a decision you will regret.”

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