5 Questions to Ask Before Buying a Second Home in Retirement

By Dan Rafter on 24 June 2016 0 comments

It's nice image: You, your children, and your grandchildren gathering every summer at the lake house you bought after you retired from the workforce. Or maybe you instead picture these same children bringing their grandchildren for long weekends at the downtown city condo you purchased immediately after heading into retirement.

Buying a second home after retirement can be a reward for years of hard work. It might also be a good investment if you buy the right property; real estate, after all, has historically increased in value.

But buying a second home in your retirement years can also be a financial misstep. These potential pitfalls are why you need to ask five key questions before you invest in that second home after you retire.

1. How Will You Pay for It?

Buying a second home is fairly simple if you plan to use cash from your savings. You still have to be careful, though, to make sure that such a big expenditure won't eventually make it more of a struggle to meet your other retirement goals. It might not be easy to take that long-awaited cruise if you've spent too much of your savings on a second home.

If you need to finance the purchase of a second home with a mortgage, you might face an even bigger challenge. Under federal law, lenders can't reject you for a mortgage loan because of your age. They can, though, reject your application if they think you don't have enough income to afford your monthly mortgage payments.

Lenders rely partly on your debt-to-income ratio when making mortgage decisions. Lenders want your total monthly debts, including your new mortgage payment, to equal no more than 43% of your gross monthly income. Income, of course, isn't just money you receive from a salary. You can also count Social Security payments, pension payments, monthly rent checks, money from legal settlements, and any other recurring source of monthly income. But if your income is so low that your debt-to-income ratio sails over that 43% mark, you'll struggle to get the mortgage you need to buy a second home.

2. Can You Afford It?

This, of course, is the big question: Even if you can buy a second home, can you afford the monthly expenses that go with it now that you can no longer rely on your regular paycheck?

If you are financing the second home with a mortgage, can you afford to add those monthly payments to your existing expenses? And even if you are not taking out a mortgage, you'll have to face the normal expenses associated with owning a home: Furnaces go out, water heaters leak, and utility bills add up. If you buy a condo as a second home, are you okay with paying association dues each month?

In short, can you afford the financial burden of owning that second home?

3. Who Will Maintain It?

Homes require regular maintenance. Someone has to mow the lawn, shovel the walks, sweep the floors, and replace fading paint jobs. Is this something you are willing to do, even as you get older? You might think your children will be happy to spend a few hours pulling weeds and mowing the lawn. But are they really okay with that?

You might need to hire a service to handle the regular maintenance of your second home. That will ease your burden. But these companies don't come cheap. Can you afford the additional expense of hiring someone to maintain your second home?

4. How Often Will You Use It?

You might dream of spending months at your vacation home surrounded by visiting family members. But that dream might not be realistic. Your children and grandchildren have lives of their own. They might visit far less than you expect.

And what about you? You might think now that you'd like to spend every summer at the lake house in that quaint, touristy town. But after three or four summers, you might get tired of that restaurant you've eaten at every visit or you might no longer have the appetite for all those fudge shops and antique stores. Yes, you might get bored with your second home, too.

Instead of vacationing in the same spot, you might instead want to travel to new places each year. If so, a permanent second home might not be the best choice.

5. What Happens After You Die?

We don't like to think about dying. But when you buy a second home in your retirement, you need to consider it. What will happen to that second home after you pass on?

You might want to leave it to one of your children. You'll have to decide, though, who gets it, without causing strife among them. What if none of your children want the home? They'll then have to go through the hassle of selling the property after you die. You'll need to determine before your death, just how the proceeds of that sale — if there are proceeds — will be divvied up.

Have you considered buying a second home?

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