Broker Check

Is it Dumb Buying a Second Home?

Special to the Herald

Sometimes other CPAs bug me. Many are know-it-alls. Other are number-crunchers. So imagine my surprise when I recently met two retired and personable CPAs whom I actually liked.

"We rent a place in Colorado each summer," Dee said.

"I thought most snowbirds buy," I said thinking of all the retirees migrating to Sarasota and Bradenton each October and leaving after Easter.

"With property taxes, insurance, repairs, and other costs -- it really doesn't make sense to buy."

And then it hit me. I realized Dee was absolutely right. Legions of snowbirds have found out second homes are often disasters as investments.

It's easy to ignore or rationalize away all the red flags when buying vacation or second homes. "Don't worry, we'll generate rental income," or "We always have a place for our vacations," are often harbingers -- of negative cash flow.

Before buying a second home, consider:

Real estate appreciation lags behind other investments since the 2008 collapse of the real estate market.

Property taxes are usually higher. Second homes, unlike primary residences, aren't protected by homesteading and have higher property tax increases.

Anything with a 50 percent vacancy rate is usually a mistake. The difference to your saving rate may exceed $25,000 on a $250,000 condo.

Paying $4,000 for a few months' rent can be cheaper than $20,000, or more, in real annual costs.

Consider if you want to limit your vacations to just one location. How many times can you see the Ringling Museum, Starfish Company and Snooty the manatee?

Short term rental income might not occur -- due to vacancies -- causing you to lose even more money.

Start with worse-case scenarios when budgeting. Include taxes, insurance, maintenance, and utilities. If you don't pay cash, throw in a mortgage payment.

But renting is getting tougher for Sarasota and Bradenton snowbirds. "I can't tell you how many calls I have received looking for something during the winter month," said Kathy Valente, a top-producing real estate agent at Michael Saunders Co. "Rentals are becoming extremely expensive and hard to find. And condominiums might require a three-month rental.

"Prices are still quite low, and if one purchases a piece of property will more than likely see some appreciation, and they won't be subjected to escalating rental prices," advises Valente.

Still thinking about that second home?

Consider vacancy costs when it's not rented. Cleaning fees, HOA and management fees add up. Insist on generating positive monthly cash flows.

Vacation homes have fewer tax breaks than you might think. Many tax deductions are limited.

Appreciation in a resort area where baby boomers are moving may be better than a condo in Arkansas. Despite real estate agrent assertions, there may be little or no appreciation, though.

Hard-partying renters aren't compatible with seasonal rentals, and can add significant repair and cleaning costs. Do you really want two families of 10, including wild children, roughing up your second paradise?

Jim Germer is a Bradenton CPA and financial adviser at Cetera Financial Specialists, LLC, member FINRA/SIPC.