I started a series recently on financial planning as it pertains to real estate purchases. We talked about financial planning in general, keeping in mind our overall financial goals as we consider our real estate purchase. My friend Paul Paroti, a financial planner, shared his wisdom with me regarding making these real estate purchase decisions with long term goals in mind.

Next we discussed the issue of down payments and the financial considerations associated with making decisions about where the money is coming from, long term goals, tax implications and so on. As a financial planner, Paul again shared some thoughts on this important decision so buyers can give appropriate consideration to their down payments and where to obtain the cash. Putting a large chunk of money down may not always be the right financial decision.

Another popular focus of buyers these days, especially the baby boomers, is on buying a vacation or second home. The current real estate market presents a phenomenal opportunity for second home buyers.  Whether you’re a baby boomer looking for a home to move to permanently in a few years, or just someone who loves the idea of having your own vacation home, the housing market is ripe for buying in many areas, and thus the chance to get into a second home at a great price is there for the shrewd buyer. 

While buying a second home offers countless benefits, and sounds rather idyllic for many of us, there are some financial implications of a second home purchase  Most people are aware of all the benefits- the prestige of owning an attractive property, the enjoyment of weekend and holiday getaways and the economic benefits of long-term appreciation and a tax sheltered investment. 

However, buyers should realize that the expenses of owning a second home can be significant, and my feeling is that most people underestimate the true cost of owning a 2^nd home.  Like a primary residence, you likely expect to have a mortgage, property taxes and homeowner’s insurance (as well as HOA dues if it’s a condo or townhome).   What you probably haven’t given as much thought to are other expenses you’re more likely to incur with a second home than with a primary residence.  

•  When you buy a new primary home you’re likely to bring at least some of your furnishings from your prior home

• With a second home you’ll likely need all new furnishings unless you buy the property completely furnished - everything from living room and bedroom sets to a washer and dryer to silverware and dinner plates
• Since many second homes are located some distance from the primary home it is essential to consider the costs of traveling to and from your second home.  With gas prices where they these days are things can add up quickly
• Finally, don’t forget the costs of maintaining your second home.  Even if you’re a do-it-yourself gardener at home, chances are you’ll need to hire someone to help with your second home, unless you’re up for driving who knows how far just to mow the lawn, or taking time from your “vacation” to mow the grass and deal with other maintenance issues

I recommend that second home buyers sit down and make a list of all these “additional” expenses so you have a reality check on your costs.  Then, add 10%-15% to account for miscellaneous items and things you may have forgotten.  The purpose isn’t to scare you, but rather to make sure you give serious thought to the full ramifications of your purchase.

Buying a second home is an opportune time to sit down with your financial planner (and if you aren’t using one this might be a good reason to start working with one).  He or she will be able to “crunch the numbers” and show you how your second home purchase will affect your big picture situation.  Taking the time to do this will give you the peace of mind of knowing you’re on the right track.  Worst case scenario? If buying your dream second home would put a crimp in your retirement plans you’re better off finding this out beforehand.

By taking a little extra time to think everything through and understand the financial implication, you’re ensuring you’ll be able to enjoy your new second home without any unnecessary worries.  Happy house-hunting!

I appreciate Paul’s thoughts on these issues and recommend you give him a call or send an email with any questions about your second home purchase and how to factor this into your long term financial planning goals. Paul can be reached at (714) 424-9440 (office), (949) 466-7519 (cell) or via email at Paul@ifsplanning.com.

Why not find out how he can help YOU with your financial planning objectives?

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If I can provide more information about Carlsbad and surrounding areas, or the housing market in general, or otherwise assist you in your homes search, please contact me by

phone or text at (760) 840-1360 or email me at JDowler@remax.net.

All content copyright © 2007 Jeff Dowler