As the summer begins to wane, many people yearn for that feeling of tranquility and bliss they felt while vacationing at the beach or in the mountains…so much so that they seriously consider investing in a second home. According to Escapehomes.com, those who are driving the second-home market are over-40 consumers, active baby boomers nearing retirement, or speculative investors looking to flip properties for profit.
In other words, those contemplating a second home purchase may be many of your clients. Is this a smart move for them?
As students of investor behavior at JPMorgan Asset Management, we suggest that, before you do anything else, profile your clients to understand the motives behind this desire. As trusted advisors, your first order of business is to protect clients from their emotional selves. Have your clients thought through the numerous extras–beyond the great view or the quiet of the cabin in the woods–that come with adding a new property to their lives?
Clients’ Behavioral Tilts
Are they being overly optimistic about how often they would use a vacation home? What are the chances that going every weekend or holiday to the same place would be of long-term interest to them?
Too often, vacation homes become a point of contention between spouses or parents and children. Are your clients being overly optimistic about the “legacy” that they want to leave their children? It’s frequently the case that for adult surviving siblings the “family vacation home” becomes the cause of family fights and breakups as opposed to memories of happy, relaxing times together.
If you haven’t done so already, now is a good time to discuss what your clients’ current interests and lifestyles are and, more importantly, their ultimate goals.
Assess the Ultimate Goal
Usually when you ask clients whether they plan to buy a second home for pleasure or investment, the response is “pleasure.” The follow-up questions should then be: “How long do you anticipate owning it?” Then, “What, if any, growth rate do you expect on the value of the home?” Very rarely are there “rational” responses like “20-plus years” and a “5% or so return” (which is the approximate national residential 20-year average rate of return for a home). Commonly, the time frame is something far shorter and the expected rate of return is something much greater.
Many buyers anticipate that the value of their second home will double, even though they say it is not an investment. Make sure you relay to them what the current market valuations are, what the long-term expectations may be, and how this second home would fit into their overall financial plans.
Often clients will buy on emotional and perhaps irrational factors. They will also base their decisions on some misguided information or misinterpreted facts. The following are some of the more common misconceptions:
A vacation home is a vacation home. A vacation home can be categorized in three different ways: personal, rental, and dual purpose. The one that pertains to your clients’ individual circumstance will depend on the days used and the days rented.