Once you've picked your favorite vacation destination, visited multiple times, gotten to know the town, met the people (or lack thereof) and decided you want to be able to come back regularly, you're going to have three important questions standing in the way of making your dream vacation home a permanent reality:
Can I afford this house today?
One of the more common ways this conversation starts with many of my clients is, “We're thinking about buying a vacation property. What can we afford?”
Let's first take a look at your current monthly cash flow, your savings program and the balance of your discretionary liquid savings accounts. After you consider the down payment, closing costs and the ongoing monthly outlays associated with the property, will you still have sufficient emergency reserves in place? You can't afford a vacation home if it means wiping out all of your liquid savings.
How much will it cost me on an ongoing basis?
Similar to a home you're currently living in, there will be ongoing costs with your vacation house. You'll likely have a mortgage, property taxes, possibly HOA fees, in addition to regular repairs and maintenance. Just because you're not living there every day doesn't mean the landscaping doesn't need to be tended to, or the utilities paid regularly.
For those who occasionally rent out their vacation home to help offset costs, some owners retain a local property manager to oversee and care for the property. Unfortunately, for many do-it-yourself homeowners, they often find that managing their vacation home can quickly become another full-time job.
How will this house impact my financial plan?
Once you have determined that you will move forward with purchasing your vacation home, you'll want to measure the impact on your financial plan. Are you dipping into retirement savings or your kid's college funds to help with the down payment? Will the new mortgage and ongoing costs reduce your monthly savings and possibly inhibit achieving other financial goals and objectives?
You'll want to find a balance within your financial plan as there may be trade-offs associated with the additional costs. I have had some clients decide to work an additional few years and delay retirement to be able to pay off their vacation home in full – “That way, I can enjoy my retirement without worrying.”
Once you've answered the big questions — affording the down payment, ongoing costs and the impact on your financial plan — you can then truly answer the most important question: Should my favorite vacation house be my new home?
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Joe O'Boyle is the president of O'Boyle Wealth Management and a financial advisor with Voya Financial Advisors. Based in Beverly Hills, Calif., Mr. O'Boyle provides personalized, full-service financial and retirement planning to individual and corporate clients.