I know what you’re asking….You’re a financial advisor, did you lose all of your financial senses and fall prey to the evil temptations of overspending? Or is it a smart real estate investment? Did you abandon my financial plan? Or did I make a smart, conscious, logical investment decision?
So why did I do it?
Let’s begin with my first visit to Florida…
In Grade 12, I met my late wife, Mary, and quickly learned her parents owned a home in Fort Lauderdale.
I thought I had won the lottery. I met a beautiful woman with a Florida property…. What could be more exciting for a Toronto boy who had only ever been to Ontario beaches?
During our first year in university, Mary’s family asked if I would join their vacation to Fort Lauderdale (well, I may have asked first), and I immediately accepted.
The trip included Mary, her parents and me. It wasn’t an intimate experience in any way, but I was so excited about visiting Florida that I didn’t mind the lack of privacy.
Turns out they owned a two-bedroom, one-bath bungalow approximately 10 miles from the nearest beach. But the community had a neighbourhood pool, tennis court and a big supermarket which sold beer and wine (how novel!).
Mary and I would borrow the neighbour’s car (no Ubers back then) and drive to Lauderdale Beach and spend hours in the water, sunbathing and walking through the Fort Lauderdale strip.
When we didn’t feel like hitting the beach, we would visit the local attractions, such as the Mai Thai restaurant, the drive-in movie theaters, and the outdoor flea markets, and also ride our bikes around the many communities.
We were 20 years old, madly in love, and without any responsibilities. We were free. Do you remember a similar experience of complete freedom?
I will never forget that trip.
It was more than I could ever expect, and I fell deeply in love with Mary (and Florida). We promised each other that one day we would buy a Florida property and bring our own kids to this beautiful beach and state.
Mary and I continued to visit Fort Lauderdale and eventually brought our kids to its sands and also to Miami, Hollywood, and Boca Raton. We also spent several vacations in Orlando, where we enjoyed the attractions at Disney and Universal Studios.
I can’t exactly put the appeal into words. But I feel connected to the sand, saltwater and attractions that the state of Florida offers.
Initial considerations before buying a Florida condo
It’s obvious I have an emotional connection to Florida. But I have taught clients to make investing decisions with their brains and not their emotions, so how do I justify buying a vacation home?
As you read, keep in mind that my economic rationale can also apply to buying a cottage property on Georgian Bay or any other place you’re drawn to.
Buying a vacation property involves the following considerations:
- The initial purchase price
- Any upfront renovations and all ongoing capital maintenance
- Furnishings (i.e. kitchen appliances, furniture, bedding, and so on)
- Property taxes
- Hydro, Internet, phone and other home expenses (including condo fees)
- Traveling costs (gas or airline tickets)
In short, it’s not cheap to own a second property, and affordability should be carefully analysed.
Here are three tips to see if you can afford a second home.
1. Pay off the mortgage on your principal residence first.
Increases in the value of your principal residence are tax free, while the interest on the mortgage is not tax deductible. Hence, your mortgage should be your first priority. Also, I suggest being debt free before considering a second home.
2. Buy the property with cash.
Only buy what you can afford to pay in cash. If you don’t have cash surplus, wait until you have built up enough money to buy the second property with cash (I waited until I was 59 years old).
3. The additional monthly expenses should not increase the monthly budget.
If your second home costs $1,000 per month to carry, I suggest reviewing your current budget and reducing expenses by approximately $1,000 per month.
In my case, I will be selling my second car to remove that carrying cost, dropping my cable service and using Apple TV, buying out my remaining car and eliminating lease payments, and dropping an old life insurance policy that I no longer need as the kids are self sufficient.
These changes will completely offset the additional costs of the Miami condo.
Here are three tips to see if you can afford a second home.
Will the second home be used?
During the pandemic, many people felt they “needed” a Peloton. If you’ve never heard of a Peloton, imagine a stationary bike with a screen and an Internet connection.
Now that we’re hopefully close to the end of the pandemic, many of those people no longer feel the same “need” because now they can visit the gym or simply cycle outside. I expect many unused Pelotons will soon be collecting dusk in basements across the country.
What’s my point? Like a Peloton, a second home may be a short-term attraction that is used extensively during the first few years but gradually less and less as its enjoyment fades.
I don’t have to remind readers that the monthly expenses keep accumulating regardless of whether the home is or is not used.
Once your family has decided to buy a second property (and can afford it), I suggest renting for a few years to assess whether the home will be used for the long-term.
Do I expect the Miami condo to appreciate?
I have no idea if my condo will appreciate over the years (or decades), but I do expect it to hold its value and appreciate at the rate of inflation. If my expectations are correct, I will always be able to sell it for the same money I invested on day one (inflation adjusted).
So, if my finances ever deteriorate, I can reclaim my expenses.
Finally, should you buy a condo or second home?
Go ahead and buy the property once you have determined:
- You can afford a second home.
- The home will be enjoyed for many years to come.
- It is located in a real estate market where, historically, buying/selling is well established and can be accomplished without triggering a “fire sale.”
Note that I have avoided discussing the US tax code and its effects (if any) on the purchase of US property by a non citizen and/or a non resident.
I suggest discussing this issue with a tax accountant specializing in Canada/US tax law.
If you are thinking of buying a second home but not sure if you can afford the purchase, please give me a call and I can help you walk through the thinking and make a final decision.
Never Retire Profile
For a long time, it’s been impossible to think about men’s tennis without the name Novak Djokovic jumping to mind. Along with a small handful of other players, the “Serbinator” has been dominating the sport for many years and won the French Open this month. At the age of 34, Djokovic’s 19th Grand Slam was no small feat. Along the way, he beat fellow “old-timer” (for tennis) Rafael Nadal in an exciting semi-final and then played one of the matches of his life against an up-and-comer, 22-year-old Stefanos Tsitsipas, for the win. With this achievement, it’s possible that the best tennis player this year is about to become the greatest tennis player of all time. If Djokovic defeats Nadal and Roger Federer later this year, he’ll be tied with them at 20 Grand Slams each. In his present form, he looks able to blast past them. Whatever happens, this aggressive baseline player is not ready to retire.
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