Buying a second home?

[kandb]

I know there are many on here that are great about financial issues (that's to the person who recommended OOMA, for $4/mo for a landline phone)

We live in northern NJ and own our home. We have approx. $250K to put down on another home (we are thinking a beach home, possibly LBI). The houses at the shore are probably $600-700K. We would plan on renting out the beach home for at least 6 weeks in the summer and would probably get $2K per week.

I need advice on if this is a good financial decision or who I could consult with to see if this would be a good decision. We would use the shore house ourselves for different times of the year when our children are off of school/weekend trips etc. We would be approx. 2 hours from the shore house. Any advice on how to research this issue? Bad idea/Good idea?

 

[afan]

I think the big thing to consider would be can you afford the house without the rental income since that's not guaranteed. Will you have a management company do the rentals, arrange cleaning etc and what will that cost. Is there money to replace or fix things that get broken from more/different people using them.

Then there's insurance, utilities, possibly a security system since it will be empty so much. Being able to afford all of the costs would be my biggest concern. It should be bought because you all will enjoy it and make memories, not necessarily as an investment.

 

[kandb]

Great advice and things we should be consider. Thank you.

 

[tcufrog]

My investment advisor doesn't think vacation homes are a good investment.

 

[kandb]

I thought real estate is usually a good investment and we would use the home when we wanted to get away. I know there is a lot to consider. The money we have in the bank makes almost no interest and I am thinking of what the best thing to do with it would be.

 

[snarlingcoyote]

I thought real estate is usually a good investment and we would use the home when we wanted to get away. I know there is a lot to consider. The money we have in the bank makes almost no interest and I am thinking of what the best thing to do with it would be.

Wouldn't it be great if people went to college to learn how to best invest money for others and had to take tests to become certified to do this? Oh wait. . . (Sorry, couldn't resist.)

But seriously, find a good investment person and pay for their advice on the matter.

 

[DaisyJ]

My investment advisor doesn't think vacation homes are a good investment.

Luckily for us, our investment advisor believes the opposite as long as you can comfortably afford it.

OP, we have a second home on a lake, strictly for us to use. The extra costs are something that need to be weighed when looking and making sure you have enough to cover any emergency repairs.

Having a second place has caused us to have to save longer for other things, like vacations.

 

[tvguy]

It's an old cliche, but true. "The greater the risk, the greater the reward."
Among my circle of friends with vacation rentals, the biggest financial risk is damage from renters that exceeds the security deposit, or weather related damage that takes the property off the rental market until repairs are made.
You certainly can go to court to try and recover damage costs, but you are going to have to pay to fix the damage now, and hope to recover the money at some point months or years from now.
Weather damage (storm surges that flood beach front rentals, or roof collapses from too much snow on the roof in mountain rentals for example) you can get some help from insurance. But you then have the expense of insurance, deductibles, and lost income during repairs.
I have one fraternity brother from college who is cleaning up on his rental houses, but they aren't in a resort area. He inherited 20 Sears Kit houses that his Grandfather built in 1920. The kit cost $520, the land for each house $200. Today they bring in $800 a month rent, $50 more than they cost. They provided income for his grandfather for 20 years. They provided income for his father for 40 years, and they have been providing him income for 30 years now

 

[DLgal]

Real estate is an investment, sometimes (when it puts money into your pocket every month). When you are talking about a vacation home that is mortgaged, it's a liability.

Take that $250K and invest it with the help of a good financial advisor. 30 years from now, it will be worth more than the house.

 

[scrapquitler]

There are a lot of factors to consider besides if it is a good financial decision.

We bought a vacation home, and it hasn't been a great financial decision, but it hasn't been a bad one, either, just kind of meh on that aspect. It's worth a bit more than when we bought it, but not very much. It did mean that we had to sacrifice other things that we wanted to do: we chose for a lot of years not to vacation anywhere but at our vacation home (near a ski area and several lakes, so it's a year round area), we didn't do a bunch of renovations at our primary home that we wanted/should have done, so the value of that house has suffered a bit. There were times when we had to postpone other purchases like a new car or new furniture because we had to pay for a new well pump or a new roof, or repairs after Hurricaine Irene at our vacation home. We've never rented out our vacation home because we couldn't bear the thought of other people being in 'our house' (we don't even like to have visitors at our primary home).

But it has been one of the best decisions we've ever made. We spend the whole summer there, and virtually every weekend, we do Christmas and Thanksgiving and Easter there. It has been a great bonding thing for our family, we spend a lot of time doing fun things together that we never would have done at home because we all would have been too busy. It's where we feel centered, relaxed and at home. For us, that is priceless.

In the next few years, we will be selling both our primary home and our vacation home and moving to Florida. I don't know how the financials will work out, but even if you never take a risk, you don't know for sure that the financial stuff will work out.

 

[osopecoso]

Before investing anything, you need to have enough money to to last you a certain period of time (usually 6 months).

We have purchased 2 vacation homes (more like one and a home where we will retire one day which is in South America). We have a small home in key west that was more of a project home. Basically gutted the home and redid it (key west has very strict rules on building). I inherited the home we are in from my grandparents and used the money from our first home which was paid off to purchase out vacation home. We do not rent ours out. Just allow family members to stay there. Our neighbor in key west rents his home out on a weekly basis. You would be surprised how much damage renters do to homes. He is always needing to paint, AC guys there always fixing something, fixing plumbing all the time. This seems to happen every time a renter leaves. Make sure you always have a set amount of money put to the side for any damage to the home. Insurance does not always cover it.

 

[kymom99]

My friend's aunt lived in one of these. Loved it! There was a whole street of them. They were bought by a commercial developer and torn down, sadly.

(reply to tvguy)

 

[gottalovepluto]

Some experience in this area... the thing about buying a 2nd home is the extra costs. Property taxes and insurance and maintenance can be killer. Does it snow there? (CA girl, never been to NJ) If it snows that is a whole additional type of costs for snow cleaning and then the maintenance for whatever the snow broke when summer comes around and you find the damage from winter. How about cleaning? Is the rented place cleaned before you arrive? If you own it you'll have to decide are you going to have to pay someone to clean or do it yourself on arrival day? Food for thought

 

[gottalovepluto]

OHMYGOSH- you're turning this into a rental?! missed that part, I thought you personally would have rented a beach house if you didn't own.

My grandmother had a condo in Hawaii she used to rent out- ick! Never again! People DESTROY rentals, literally destroy them because they don't give a DARN about someone else's place. They will steal things left and right. And if you have a company managing it for you they won't go after people for damage because they don't want to loose future clients. So then you have to decide if it's worth pursuing the company for the damages. What if you rent it out yourself and they destroy the place- What are you going to do? Spend the money going after them personally for damages? No way on God's green earth would I ever purchase a vacation home to rent out to people.

 

[Eastern]

I say don't do it. We've thought about it many times and always decided against it. How much would you really use it? In the meantime, there are taxes, maintenance, the property being empty much of the year...I'm pretty sure that all of LBI is in some amount of flood zone. Taxes and insurance will add to your monthly payment.

Why not just rent a house for the times you need it? I've been a landlord and it's not easy.

In any case, look up the address you are interested in here: http://www.region2coastal.com/view-flood-maps-data/what-is-my-bfe-address-lookup-tool/ If your property is in a flood zone, you have to factor in the cost of flood insurance. Worrying about storms, tenants, break-ins and leaks is more than I want to do in exchange for a few weeks of beach access each year.

Also start reading www.bogleheads.org to learn about how to invest your money. You might want to post your question there, with some background info. They give good advice.

 

[Eastern]

But seriously, find a good investment person and pay for their advice on the matter.

No, learn about investing and manage your own money. Most 'investment people' just want to sell you a product and make a commission.

 

[snarlingcoyote]

No, learn about investing and manage your own money. Most 'investment people' just want to sell you a product and make a commission.

That's about as smart as deciding to treat your own broken arm based upon what you've learned off the interwebs and a few youtube videos, IMO. Do you have a CFP or a CFA? Do you have advanced degrees in related fields? I don't. My husband has an MBA, but that's just taught him that finances are truly complicated matters and you're best advised by people who have spent years learning about how to wisely invest money.

 

[ronandannette]

It's an old cliche, but true. "The greater the risk, the greater the reward."
Among my circle of friends with vacation rentals, the biggest financial risk is damage from renters that exceeds the security deposit, or weather related damage that takes the property off the rental market until repairs are made.
You certainly can go to court to try and recover damage costs, but you are going to have to pay to fix the damage now, and hope to recover the money at some point months or years from now.
Weather damage (storm surges that flood beach front rentals, or roof collapses from too much snow on the roof in mountain rentals for example) you can get some help from insurance. But you then have the expense of insurance, deductibles, and lost income during repairs.
I have one fraternity brother from college who is cleaning up on his rental houses, but they aren't in a resort area. He inherited 20 Sears Kit houses that his Grandfather built in 1920. The kit cost $520, the land for each house $200. Today they bring in $800 a month rent, $50 more than they cost. They provided income for his grandfather for 20 years. They provided income for his father for 40 years, and they have been providing him income for 30 years now

Sorry to go OT, but @tvguy, please tell me the houses have running water, indoor plumbing and a heat/ac source. None of that was included in the original $520 retail price, nor was a foundation of any kind.

 

[MillauFr]

That's about as smart as deciding to treat your own broken arm based upon what you've learned off the interwebs and a few youtube videos, IMO. Do you have a CFP or a CFA? Do you have advanced degrees in related fields? I don't. My husband has an MBA, but that's just taught him that finances are truly complicated matters and you're best advised by people who have spent years learning about how to wisely invest money.

I thought most of them spent more time learning how to sell the products than actually learning about the products.

 

[Eastern]

That's about as smart as deciding to treat your own broken arm based upon what you've learned off the interwebs and a few youtube videos, IMO. Do you have a CFP or a CFA? Do you have advanced degrees in related fields? I don't. My husband has an MBA, but that's just taught him that finances are truly complicated matters and you're best advised by people who have spent years learning about how to wisely invest money.

It's really not the same. In my experience, the people trying to sell me product at my local banks are 20 year olds fresh out of college. It's called sales.

I finally suffered through one 'official presentation' from a 30 something who proceeded to tell me how a home contractor took his money and how he was hurting. I wasn't going to give him the opportunity to control my money.

I suggest you start reading at www.bogleheads.org They have several recommended readings that are very helpful. Most people do not 'need' a 'money manager'. Learn the basics and you will probably do better than buying the whole life policy or the annuity that your local financial professional is dying to sell to you.