January 11, 2016. By Jennifer Wolfsberg:

Winter is upon us in the northeast, and it is all-the-more attractive to move to a warmer climate during retirement for mental and physical well-being.  One of the difficult considerations we see with clients when they make the decision to migrate and acquire a second home, however, is whether they should buy or rent. More questions arise when deciding whether to move forward with a single family home, condo, or apartment.

Each family’s financial profile differs greatly from one another. However, many of the important considerations are consistent. Here are the major concerns we see pertaining to financial plans and investment management over the long-term:

  • If purchasing a second home as a legacy asset, make sure the children are definitely interested in inheriting it.
    • In the early years, ownership may seem to be a draw to families. More so than renting, ownership provides a sense of security, an additional asset and investment, and a newfound feeling of ‘home’.  However, if the goal is to leave this property to the next generation as a legacy asset, we often counsel on looking at a property’s location, association fees, insurance (flood, hurricane) and maintenance.  Real discussions should be had regarding the true wants of its heirs, and whether or not the property is something that the children will be able to afford in the future.  If there are family assets that can assist to support the property, such as a life insurance policy benefiting a trust designated to sustain maintenance and upkeep, or if the children’s income can support such an expense, this may indeed be a wonderful family asset to share for years to come.  Unfortunately, this is not always the case.
    • In so many situations heirs are forced to sell such properties as they are unable to bear the added expenses. While some heirs can afford the property, they simply do not have the time to enjoy it while they are raising their own families.  Furthermore, oftentimes second homes (especially in the south) are in developments where all properties are essentially the same. If you should need to sell and there is little to differentiate your property from those surrounding…it then becomes a price war. These unfortunate circumstances lead to sales at inopportune market times.
  • Applying for a mortgage in retirement is extremely difficult. In many cases it is nearly impossible regardless of liquid assets and net worth.
    • Lenders are looking for earned income to support the application; social security and smaller pensions will not satisfy this requirement.  This will then force a couple to pay cash for a property with little ability to access equity in the home.  Careful consideration should be made when using cash to purchase a property, especially if this limits taxable cash flow that would otherwise be invested to supplement their retirement income.  Many families have plans to rent out the property when they are not using It. This is good in theory, but many areas are already saturated making it difficult to find suitable renters.  Although rental income can be a great addition to retirement income, owners should consult with their CPA and estate attorney in regard to rental income rules. We do not recommend families assume any rental income if they are going to purchase a home since such income is never guaranteed.
  • We recommend renting for one to two seasons in the area of interest prior to making any permanent investment decision.
    • This will allow the individual or couple to test a given area and see if the culture and location are fit for their lifestyle.  Through this process one could find that a certain coast or community suits their style better than another, which is a benefit of renting before buying. Purchasing a property will lock you into a decision that could be costly if you sell short-term, while renting allows you to explore your options.  Additionally, as couples age many begin to have health related issues which bring them back up north where their doctors and families are located.  We believe that access to health care and a support system is a strong consideration for renting and the flexibility it provides.

There is no one perfect answer for every family, but liquidity risk, age, health, and the long-term goal for the property should be at the forefront of considerations when making such a decision.