It’s natural to come up with an idea of what retirement will look like well ahead of that milestone. And your picture of retirement may involve owning a second home.
In some cases, buying a second home could make sense. If you intend to split your time somewhat evenly between two different parts of the country — say, the Northeast in the spring and summer and Florida in the fall and winter — then it could be a good idea to invest in a property of your own. That way, you won’t have to deal with the stress of securing a long-term rental year after year.
But some seniors opt to purchase a second home they use largely for vacation purposes. Maybe there’s a specific beach town you enjoy spending summers in. Or maybe there’s a quiet area near a lake that you want the option to escape to for a few weekends a year.
Buying a second home in retirement might seem like a smart idea. But it’s a move that could also backfire on you financially in a really big way.
You’re tying up a lot of cash
Some retirees opt to buy a second home outright rather than mortgage it. But even if you take out a home loan, chances are you’re looking at making a sizable down payment on a second home you buy. So either way, you’re potentially tying up a lot of money in a relatively illiquid asset.
One thing retirees are advised to do is have cash on hand so they’re not forced to tap their savings at a time when the market is down, thereby potentially locking in losses. But the more money you have tied up in a home, the harder it becomes to leave your IRA or 401(k) plan balance alone when there are bills that need to be paid and the market is doing poorly.
Your costs of ownership might far exceed what you’ve budgeted for
Another hiccup you might run into if you buy a second home as a retiree is having to maintain it. You may be just fine to cover its mortgage and property taxes. And if you’re buying that home outright, you won’t even have a mortgage to pay.
But homes have a tricky way of costing more than expected. If you buy a place that’s shockingly expensive to maintain, and you run into a lot of repairs, it could really wreak havoc on your budget.
Renting out your second home isn’t necessarily the best option
It’s one thing to buy a second home in retirement that you expect to use often. But a home you might only use for select weekends during the year, or for a shorter stretch during only one season, is a different story. In that case, you might end up sinking a lot of money into a property that doesn’t make sense for you to own.
And if you’re thinking you’ll just turn that second home into a rental, well, that may be a viable solution. But you might also find that being a landlord is more work than it’s worth.
And remember, you’re not guaranteed to be able to find a tenant when you want to. If you’re buying a beach house to occupy in July and August only, that may be the peak time when renters would likely want to use that home. So you may have a hard time finding someone to rent it out in November, January, or March.
Also, when you invite tenants into your home, there’s the potential for damage to occur. You may not want to take on that risk.
All told, it’s easy to see why you may be inclined to buy a second home as a retiree. Before you do, run the numbers and see if renting a place in your preferred vacation spot is a better choice. You may find that for a fraction of the cost, you can secure lodging when you need it without taking on the risk of owning a second property yourself.