Should You Continue Renting or Buy Your Second Home?

There are two times of year when the buy vs. rent a second home question comes up.  The first is during the winter when many members are down South or out West in warm temperatures while the rest of us are battling another New England winter.

And, the second is in the middle of the summer when members rent homes for stretches at a time on the Cape or in New Hampshire or Maine.

I know this dilemma all too well.  We rented in Chatham for fifteen summers before purchasing our first home down there in 2011.

When you’re in the middle of all the fun, it’s very hard not to allow your mind to wander.   You pass homes with “For Sale” signs and begin to wonder “what if?”

You scour the internet for all homes in the area you are renting in, look at some pictures, watch some videos, and visit some open houses!

Sound familiar?

I have had this conversation dozens of times over the years and I’ve seen different conclusions reached many times.

I’m in the middle of helping a Relaxing Retirement member evaluate whether to continue renting a home down on the Cape vs. buying their own home so I thought it would be a good time to revisit this topic and provide you with the same checklist I shared with them to help them evaluate and arrive at a rational conclusion based on their individual desires.

This is one of those big decisions that is extremely hard to de-emotionalize yourself from, so it’s very important to take a rational step back to look at the big picture first.

The big question always centers around buying vs. renting.  And, because there are so many factors involved, there is no correct “rule of thumb” answer.

My first recommendation is to spend some significant time with these questions to begin:

Questions To Ask Yourself

  1. The first big question you want to ask yourself is how many days in a year can you really see yourself being at the second home? If the answer is two weeks, you know which option you should choose.  Rent!
  2. Do you have family members or friends who would take advantage of it and utilize it when you were not there? (Another justification for owning)
  3. How long can you see yourself owning it? How many more years can you see yourself traveling to this location on a regular basis?  5 years…10 years…20 years?
  4. Who will maintain the property while you’re not there? Is it part of a condominium complex where a service is available for the fee you pay?
  5. Lastly, are you going to rent it out while you’re not there? If so, do you want to be a long-distance landlord?  The big downside of this is that the time of the year you want to be there, i.e. winter months, is exactly when someone would want to rent it from you.  There’s not much of a market for renters in Florida or Arizona in July!

Ditto for renters on the Cape in January and February!

Many times, if you take a step back and rationally answer these simple questions, you can determine the best option for yourself.

Advantages of Buying and Owning

Let’s begin by weighing the advantages and disadvantage of purchasing and owning a vacation home:

  • You expect to be in the second home for an absolute minimum of four months per year, and you want it to be your home
  • You can develop real friendships with neighbors and residents so it feels like home to you. **This is an often overlooked and very important benefit which is hard to know unless you’ve owned a second home.  Many members share with us that they have a completely new and different circle of friends at their second home.  I concur.
  • Freedom and Control: You can come and go as you please with no limitations, and leave belongings behind such as clothing and a car
  • Family and friends can use it for their vacations while you’re not there, or you can host family and friends
  • Locking in the price of a home, especially at depressed prices if available
  • Income Taxes: if you’re going to live there for more than six months, you may establish residency there and potentially reduce your state income taxes, i.e. in Florida, there are no state income taxes.
  • Real estate appreciation: Although I don’t recommend treating it as an investment, owning an appreciating asset is always a plus (of course making the assumption that your property will increase in value over time)
  • Pride of ownership

Disadvantages of Owning

  • Costs: you’re responsible for any condo fee, real estate taxes, insurance, utilities, maintenance, and upkeep
  • Lack of control over rising real estate taxes: This has become a challenge with second home buyers in Florida for whom this in not their primary residence. Unfortunately, you have no control over your town’s evaluation of your property. They have the power to increase your property taxes.
  • Lack of control over rising condo fees (assuming for a moment that you live in a condo). The association controls this.  You want to speak with other condo association members about their experience with the association.
  • Having to care and maintain the property from a long distance. While this may not sound like much, imagine what it is like for those who own homes in Florida during hurricane season.
  • Being caught in a buyer’s market when you want or need to sell

Take a moment to write down your thoughts on each of these, and the questions above.

Advantages of Renting

Let’s now weigh the advantages and disadvantage of renting a vacation home.  When we’re done, we’ll pull it all together so you can make an educated decision that you can be comfortable with.

  • No large sum of out-of-pocket cost to purchase
  • No costs other than rent
  • You’re not locked into one destination each year. This is a big one that you have to carefully weigh.  While some love the consistency and friendships developed in one location, others get bored and need variety.
  • You have no other responsibilities other than paying the rent and preventing damage to the property while you’re there
  • As needs, desires, priorities, and life circumstances change, you have the flexibility to change plans without having to sell

Disadvantages of Renting

  • No control over future rent increases (could get priced out of the location you desire)
  • No equity buildup if prices of real estate increase
  • Must live by the owner’s rules (i.e. no pets, etc.)
  • Unless you drive to the destination, you may have to rent a car which is very expensive

As you can see, there are strong advantages and disadvantages to each.  Much of it comes down to your answers to the initial questions I posed in the beginning.

For instance, if you plan to be in your vacation spot four months per year, you’ve been to this location before and you know you like it, you have family who will also utilize it, and you have friends who live in the same community, ownership is clearly the way to go given the choice.

However, we find that renting works for many of our Relaxing Retirement members, too.

Several of them rent for two weeks to as many as four months and get great benefit and value from doing it.  It suits their unique situation.

The all-important initial step is to de-emotionalize yourself from the situation so that you can calmly and accurately make a decision that is based fact, not emotion and opinion. (i.e. try not to make a decision “if” you want to own property when you’re sitting in the middle of a real estate sales presentation at the newest condominium complex in a town you’ve been to once in your life!)

Your emotions are too high at that point. You want to treat this just like all of your other financial decisions, as part of a carefully thought out plan, not an isolated decision in a vacuum.

Visualize the next 20 years of your life.  Can you vividly see yourself living a good portion of your life in this location?   That’s the real test.

If you’re seriously thinking about buying, my recommendation is to rent initially for an extended period of time (minimum of four weeks), so that you can get the feeling for what it is like to actually “live” in this location as opposed to “vacation” in this location.

Then you can make a rational decision that you can be happy with for many years to come.

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The Pros and Cons of Buying vs. Leasing Your Next Car

After multiple car buying discussions with some of our Relaxing Retirement members over the last few weeks, I decided to share my car buying experiences and my thoughts on a car as an asset vs. an expense with you in the last issue.

(If you have not read it yet, I suggest taking a quick look at it before proceeding on.) 

I concluded by promising to analyze the pros and cons of buying vs. leasing a new $40,000 car. 

Let’s now dig into that….

For the sake of our discussion today, there are two important points to make:

  1. All money that you spend to purchase and maintain a car is an expense. So, for example, all of the following can fall into the “car expense” category:
  • buying the car for cash,
  • making a down payment,
  • making loan payments,
  • making lease payments,
  • sales and annual excise taxes, and
  • repairs and maintenance
  1. For the sake of our discussion today, I’m also going to assume that you’re going to purchase a new car as opposed to a “pre-owned” (used) car.

A great case can be made for purchasing a low-mileage, pre-owned car.  As I shared with you, I purchased two SUVs with very low mileage a few years ago and got great deals.  I wish I could tell you that I set out to do this.  I did not.  The first one fell into my lap and I was able to duplicate the process four months later with a little research. 

For the sake of our comparison today, let’s stick with purchasing a new car.

As I mentioned in the last issue, I believe you should have a long-term car buying “strategy” which governs how you purchase cars, so let’s begin to analyze the pros and cons of each method of payment.

Before I begin, I don’t want you to overlook the last few words of the last sentence: “method of payment.”  Essentially, that’s what we’re talking about here. 

You’re still purchasing a car.  The question is what “method of payment” works best for you.

Buying

If you buy your cars outright, or use car loans, let’s assume that you buy and keep them for approximately 8 years. 

Except for extreme situations, purchasing a brand new car every 3 years with cash or using loans is never a good financial decision. 

The reason for this is that cars depreciate massively in the first few years so you don’t walk away with very much.  This is especially true if you trade them in to a dealer.

So, assuming you keep your car for 8 years, your cash outlay looks like the following:

  • Year One: $40,000 is paid in cash to purchase the car, plus taxes, title, insurance, and registration fees. Maintenance costs are minimal.
    • To free up this $40,000, you take the money out of an interest-bearing savings account. Or, you withdraw a larger amount from a tax-deferred account like an IRA and pay taxes before you can “net out” at $40,000 to pay for the car.
  • Years Two through Four: your out-of-pocket costs for maintenance are minimal. (oil changes)
  • Years Five through Eight: your out-of-pocket costs can be extensive as most significant car repairs and maintenance occur around 50,000 miles:
    • new tires,
    • brakes,
    • exhaust system,
    • timing belt,
    • tune-up, etc.
  • Year Nine: Begin the process all over again. Hopefully, if your car has good residual value, you can sell it for a reasonable sum of money to use toward the purchase of the new car. 

However, you do have to take the time to sell it or take the easy way out and trade your vehicle in to the dealer.  The downside of that, as you know, is that the dealer will not pay you what your car is worth on the retail market.

Leasing

  • Year One: You begin the process by purchasing a car using a lease. As you would if paying cash for the car, you still pay up-front for any taxes, title, insurance, and registration fees.  (It makes no sense to pay a down payment toward the principal on a lease) 

The only other cost when you pick up your car is the first month’s lease payment (approximately $550 per month for a $40,000 car depending on the make and model you want, and the residual value).  And, just as if you bought the car outright, maintenance costs are minimal.

  • As I mentioned in last week’s edition, two different $40,000 cars can have monthly lease costs which are $150 per month apart. The reason for this has to do with the residual value of the car (what the leasing company believes they can sell your car for in 3 or 4 years). 

Some cars, like Honda (Acura) and Toyota (Lexus) for example, hold their value very well, so leasing them is much cheaper than leasing a Ford.

  • Years Two and Three (or Four if a Four-Year Lease): Your out-of-pocket costs are:
    • your $550 per month lease payment, and
    • minimal maintenance costs (oil changes)
  • Year Four (or Five if you have a Four-Year Lease): you begin the process all over again. You turn in your car to the dealer and begin leasing a new car just as you did three years ago.

What can make leasing an attractive option is that it “month-a-tizesall of your car expenses: purchase and maintenance.  When you buy cars outright for cash, (or use loans), your out-of-pocket expenses are more random.

When you lease, you pay no lump sum down payment.  You just make a monthly payment until the end of the lease (3-4 years).  At that time, you turn the car in and start all over again.  There are three big advantages to this:

Outside of routine oil changes, you rarely pay for car repairs because cars typically don’t require repair in the first 3 years of ownership.  And, you’re not inconvenienced waiting for your car to be serviced.

  1. You never have to place large sums of money (down payments, etc.) into a depreciating asset. Instead, your money can continue to earn interest or capital gains (potentially).
  2. You have a predictable monthly “car expense” payment which matches when most individuals receive their income, on a monthly

As you can see, the bottom line is to evaluate your driving habits, and the make and model of the car you wish to purchase first. 

As I outlined last week, if you drive less than 15,000 miles per year (especially if less than 12,000 per year), and you plan to purchase a car with a high residual value, you really should do the math and considering leasing.

However, if you only drive 4,000 to 9,000 miles per year (as some of our Relaxing Retirement members do), then it makes more sense to buy outright and keep your car for many years.  If you don’t drive very much, you end up giving your leased car back to the dealer at the end of your term with very little mileage so the dealer wins.

Either way, make your decision after carefully weighing the alternatives.  Don’t allow yourself to be manipulated by a car salesman or the “manager” at the dealership.

Have a very definitive car buying strategy in mind and make your decision on your timetable, not theirs.

Happy car buying!!

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How You Will Buy Your Next Car

It’s that time of year again!  I’ve had multiple car buying discussions with Relaxing Retirement members over the last two weeks, and it reminded me to share my thoughts on buying.

A statistic that every car dealer and manufacturer knows that most outsiders don’t is that a car is purchased every three years (on average) in every household.

Yet, in spite of this high level of frequency, purchasing a car remains one of the most stressful activities we all participate in.

I don’t know anyone who likes it which is why I get so many questions.  I hate it as well, but it’s a necessary evil.

In my view, given the enormous cost of cars these days, it’s a very good idea to take the time to evaluate the most cost-effective way for you to purchase your cars both now and in the future.

With all the “financing” options you now have available to you, you really have to do your homework.

New vs. Pre-Owned

Before we begin with how you should pay for your next car, let’s talk briefly about buying a new car vs. pre-owned (formerly known as “used”).

In our home, we have typically purchased new cars.  However, after test driving a new Land Cruiser SUV a couple years ago, the salesperson informed me the dealer wanted me to know that he also had the Lexus version of the same SUV.

The dealer had been driving it and it only had 1,200 miles on it.  Most importantly, he would sell it to me at a deep discount.

After test driving that car and evaluating the numbers, I would have been a fool not to buy the Lexus.  It’s a better car and the price reduction was too great to pass up.

This all worked out so well that we did the exact same thing with the same model four months later!  However, this time, I had to do a little research to find one with very low mileage.  I found another great option through another dealership.

I mention all of this because, depending on the model of car you want, buying a low mileage, pre-owned car may be a good option for you as well.

Appreciating vs. Depreciating Assets

Assuming for a moment that you’re considering the purchase of a “new” car, the first factor I believe you have to think about is purely financial.

Most of us have been conditioned over our lifetime to “own” everything.  And, I believe that’s a worthy goal.

However, if you stop and think about that, what you want to own is “appreciating” assets.  So, for example, owning your home makes the most sense for the overwhelming majority of individuals.

And, it makes sense because house values have traditionally appreciated throughout history, although not always as we all learned during the financial crisis in 2008-2009.

A car, on the other hand, is a “depreciating” asset.   In fact, it depreciates rapidly, so you have to really question your desire to own it for “pride of ownership” reasons.

The exception to this, of course, is the individual who “really” likes cars and spends a lot of time working on them and maintaining them as a hobby.  And, we have some Relaxing Retirement members who fall into this category.

Simply an “Expense”

If you really stop and think about it, purchasing and owning a car is simply another expense, much like many other expenses you have in your life.

It’s really not a very good “asset” from an ownership standpoint.

So, for the sake of our discussion, I consider and equate all money that goes into the purchase and ownership of a car as an “expense”.  For example:

  • buying the car for cash,
  • making a down payment,
  • making loan payments,
  • making lease payments,
  • paying sales and annual excise taxes, and
  • repairs and maintenance

These are all “expenses” and have to be considered in your overall analysis of “how” you’re going to pay for your new car.

When you break it all down, it’s all a matter of “how much” you will pay and “when” you will pay it.

I recognize that most individuals give no thought whatsoever to how they’re going to buy their cars.  However, I recommend having your own personal “long term” car buying strategy.  And, that strategy should govern your car purchases.

Mileage

Before we get into analyzing what would make the most economic sense for you, the question of buying vs. leasing a new car comes down to a few factors:

  • your anticipated annual mileage, and
  • the make and model of the car (and, in turn, its residual value)

Let’s start with mileage.  If you know that you will be driving in excess of 12-15,000 miles per year, leasing gets pricey because they have to charge you up-front for excess mileage on the car.

Given this, leasing rarely makes sense if you’ll drive in excess of 15,000 miles per year.

On the flip side, if you don’t drive very much, leasing doesn’t make sense either.  If you turn in a leased car after three years and you only drove it for 18,000 of the 36,000 miles you were allotted, the dealer got the better end of the deal.

Given this, the sweet spot for leasing is driving between 10-12,000 miles per year (and possibly 15,000 depending on the model).

Car Make and Model

Depending on the make and model car you wish to buy, two $40,000 cars can have monthly lease payments that are $150 per month different.

How can that be?  Well, there are only three components to the monthly lease cost:

  • price of the car,
  • the leasing rate (interest rate), and
  • the “residual value”. (The residual value is based on the price the leasing company believes they can sell the car for after you turn it in 3 or 4 years down the road)

Some cars have terrific residual values: Toyota (Lexus), Honda (Acura), to name a few.  Others, unfortunately, do not.

So, for example, leasing a Toyota or Lexus that costs $40,000 is typically cheaper than leasing a Chevrolet or a Ford that have the same sticker price.

Now that we’ve laid this groundwork, we’re going to analyze the pros and cons of buying vs. leasing a new $40,000 car in the next issue.

Stay tuned!

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