Maybe you’ve watched those late-night infomercials showing how easy it is to buy and flip homes for massive profit. Or you’ve heard stories from friends who’ve made money renting out a house they bought or inherited. Perhaps you’ve been dreaming about that vacation home.

Whatever the reason, buying a second home is a big deal. It’s a riskier investment than most people realize, and it takes a lot of work. Here are some questions to ask yourself before you take the plunge.

Why Am I Buying This Property?

The first question you need to answer is why you’re thinking about buying a second home. You may want a place at the beach, in the mountains or close to loved ones. Those are valid reasons. However, ask yourself first, Do I really want a second home or am I just looking for two nice beach trips per year? If you just want a mountain getaway two or three times per year, there may be a less stressful, more affordable way to do that.

What’s not smart is buying a second home so you can keep up with the Joneses. Your neighbor or work colleague boasts about that vacation spot in Florida, but you don’t know what’s going on behind the scenes. They may be in debt up to their eyeballs. They may lie awake at night wondering how they’ll get out of the hole. Buying a second home because you think that’s what rich people do is just not smart. And the truth is, the majority of everyday millionaires don’t even have a vacation home.

Do I Have the Money on Hand?

If you want to own a second home for the right reasons, the second question to ask is whether you have enough money in your pocket for the purchase. Only consider a second home if you have the cash on hand to buy the property. Yep, I said cash only. You should never take out loans for a second property, even if it’s an investment. A loan is a risk. If you take out a mortgage, you’ve added an element of uncertainty in your future. No matter what’s going on with you—job loss, death in the family, serious illness—that mortgage company expects its payment every month.

Do I Have Cash for Upkeep and Emergencies?

Now, I’m not talking about your emergency fund you use to pay for that broken radiator or trip to the ER. You need a second, separate emergency fund for any additional property you purchase. That way, you always have cash on hand for maintenance when something breaks—because it will. With an additional home, you also pay extra property taxes and homeowner’s insurance. A second home may also impact your tax situation because the IRS treats second homes and vacation homes differently than your primary residence. Make sure you talk to a tax pro before you take that leap.

Are You Planning to Live in It?

If you plan to live in the second place without renting it out, you need to factor the costs of owning that home. You’ll be paying double the homeowner’s insurance, double the utilities, double the property taxes, etc. You get the idea. You don’t want to ruin your retirement dream by taking on more than you can feasibly afford.

Are You Planning to Rent It Out?

Some people like the real estate game and want to rent property as a part of their retirement plans. However, being a landlord isn’t for everyone. If you’re planning to rent out a second home for income, here are several things you need to keep in mind:

  1. Rental income isn’t guaranteed. You may have a place to rent, but that doesn’t mean someone wants to rent it. Unless it’s in a resort or tourist area, you might go weeks or months without renters. If you’re counting on that income, you may be up a creek.
  2. Renters can cost you money.Your second home may be awesome, but chances are it won’t stay that way forever. Even if you ask for and check references, you can’t guarantee the actions of others. People can do way more damage than what’s covered in a security deposit!
  3. Long-distance properties need local love. If you want to purchase a second home to rent out, the smart move is to buy one in your area so you can keep an eye on it and make minor repairs when necessary. If you purchase a second home a long distance from your primary residence, you’ll need local management, which will cut into the profits you were hoping to earn from the house.
  4. Know the local laws about rentals. Some cities and towns are slow to react to someone who is behind on their rent. You may lose several months’ worth of rent plus the legal cost of getting the tenant evicted. Know the laws before you purchase the home.

I’m not discouraging you from renting property. I just want you to go in with eyes wide open. Being a landlord may be a retirement nightmare instead of a dream come true if you don’t know all the facts beforehand.

Are you buying to flip and resell?

If so, you need to think through that decision carefully. Those reality programs don’t show everything. There’s way more hassle and headache to home renovations than they talk about in 30 minutes. You need to consider whether or not you have the skills, patience, and time to flip quickly. After all, time is money!

You also need to think through the tax implications—like capital gains tax. This applies to you if you sell something for more than the price you paid for it—like a house. If you flip and resell a house without owning and/or living in it for at least two years, you’re likely going to pay taxes on the profit. Make sure you prepare for that extra expense and don’t get caught off-guard.

Is It Worth It?

When you’ve worked through all these questions, you need to decide whether the pros outweigh the cons. If you have enough in savings and a second home is part of your retirement dream, congratulations! Well done! Or you may come to the conclusion that buying a second home just isn’t worth the time and hassle. You might discover that renting a condo on the beach is a better option than buying your own.

Whatever your dream, remember to stay the course and don’t let emotional or impulsive decisions derail your hard work toward your wealth-building goals.

If you’re considering a second home, contact one of our real estate pros who can help walk you through your options. In the meantime, keep moving closer to your dream retirement!

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