Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president and financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter.
Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to the program. I'm Chris Boyd, a certified financial planner, practitioner. I'm here with Jeff Perry, my co-host.
We are both of the AMR team at Wealth Enhancement Group, and we're joined today by a special guest, Britta Ferguson, CFP, and she is from Carnado, California, also a senior vice president and financial advisor with Wealth Enhancement Group. Thanks for being with us. Yeah, thanks for having me today. I look forward to it. It's good to have you here. We've seen some of your articles on LinkedIn and various things and said, oh, that's a good one. We should talk about it.
So that's what prompted us to reach out to you, a couple of good LinkedIn posts. And we thought, oh, let's talk about that with our audience. We've got a topic that I think is a great financial planning topic, the notion of trying to consider buying a second home, like a vacation home. And I'm sure there's a lot to give weight to in thinking about this on the one hand, should I rent? Should I buy? When you go through the process, how do I decide if I can afford it?
Maybe even where should I begin? So there's a whole range of things. Where should we begin, do you think, in this process? That's a great question. And I think it's only fitting somebody that lives in San Diego and Coronado, California will be the person to answer these questions. Well, as a financial planner, there's a lot of different things to be thinking about because when you are buying a second home, it's really what is the goal for this second home?
Is it going to be more for your personal use? Is it more for an investment? And so something that we always like to start with is just understanding kind of what is the end game? And what is the vision with it? Are you taking more of kind of like an emotional approach with it? Are you being a bit more rational with the thinking? And so that's kind of the starting point is what is the vision? What is the end game? And then we work our way backwards regarding a few things.
So is there a minimum amount of use that would make it before you'd say, hey, that's really probably not worth entertaining as a second home? You know, where you'd say, well, maybe you want to rent instead? Or how do you approach that question of how much and that sort of thing? Well, I think it's we always encourage our clients first to go rent in the area that they're even considering.
So before making a really large purchase or a big decision, you should make sure that is this the area you want to be spending your time? You know, when it comes to accessibility to get there, when it comes to the day to day of being there, like how do you envision spending your time at this new home? Because sometimes we found that the second home actually turns into the primary home.
And so if you're, you know, for instance, you've got the New Yorkers that like to go down to Florida, the snowbirds. And so it's really understanding from like a financial standpoint, or is this going to be vacant? And you're just going to be owning it just for you and the family and whoever else? Or are you wanting to actually make some money off of this during the interim when you're not able to spend the time there?
Because that's going to have different implications when it comes to write offs, taxes, things like that. Do you want to elaborate on that? And is that something you encourage people to, you know, like start sooner than they might need it so that they have the investment property features? Or is it something that, you know, maybe that creates its own complexities for tax considerations and liabilities and all the rest? Great question. So, you know, it depends on affordability first.
So when you're looking at getting a second home, is it with the intention of looking to, number one, it's financially feasible for me to do, but only under the, if I'm able to do it because I then get an income stream for it, it's affordable. Because remember, a second home mortgage, you're not going to get the same type of tax benefits. It's going to have a much larger down payment than what a traditional home will have. Insurance can be very costly.
And if you think about, for instance, in Florida, hurricane insurance isn't something you necessarily have to worry about in New York. So what type of insurance and costs to furnish the home are you going to be taking on? So one, is it affordable? Two, it's only affordable if I'm able to then rent it out or no, actually I've done a great job saving. And I really just like spending my time in the same place on a regular basis.
Because another thing to think about is what if you like to travel a lot of places, what if you don't want to rent this home out? So what then is the affordability factor? And is that going to then be limiting some of your other financial goals that are important to you to be achieving? And then remember when you're not there, property taxes still have to be paid. There's ongoing maintenance.
Typically there's HOA fees because most times people buy a second home, then some form of a gated area, they're not there all the time. They want that additional security. A side note on the contemplation of, can I make this an Airbnb or rent it out? Oftentimes the neighborhood you want to live in or the condos that you want to purchase have restrictions.
I've seen, I saw one gentleman who bought a condo on the beach to do what you're talking about, he's going to rent and own and live in it for the good months, try to rent it out. And he just wasn't under the rules. So there's some homework. He wasn't able to under the rules. There's some homework you need to do and not make assumptions because you may not be allowed to rent out what you're thinking when you initially purchase it. Exactly.
So that would be more kind of like in the legal and regulatory issues that you're having. And so when you think about it, understanding Airbnb short-term rental laws, those are going to be very, very important. Also too, if you want to make any additions or make major changes to the property that require having to go through the city, those are also things to be considering. So, and what are the quiet hours? So if you were, for instance, in Big Bear, California, you have to have your lights
off by 10 p.m. Well, how many renters or Airbnb-ers are really following that guideline? And who would ever think that I have to have my lights off, outdoor lights off by 10 p.m.? So these are all the things that having conversations too with people that live locally to really get a better understanding of what is the impact on that? What are the requirements? And in San Diego, for instance, they only have so many Airbnb permits available. So would you even be eligible to get the permit?
And if you bought somebody's home that did have a permit, is that then transferable to you? So there's a lot of things to be considering in that regard. What about the other possibility of thinking, how does this affect whether I'll be able to go anywhere else? If you're still in that mode of trying to do second home as a vacation destination, it seems like you have to be pretty committed to that's your destination that you really want to keep going back to. I couldn't agree more.
And I feel kind of similar in that regard, because I'm a big fan of the mountains. I love Utah. My fiance and I, we love to go snowboarding. But we always toy, should we get a place? Should we not? But then we realize we actually like to stay in different parts of the city. We like to go to different mountains. And so if that's not something that you truly envision, I want to consistently go and spend my time at the same place.
Really make sure like, are you romanticizing this concept of a vacation home? Or maybe just rent, go to the hotels, try out the different spots, and then decide if you really like that. Because if you're in your earlier, I'm just, you know, I just retired, I'm in my go-go years, you're probably in the mode to want to explore a lot.
And if you have this big asset over here, that's going to be pretty costly to you, doesn't make sense to then take on this additional responsibility from a financial and also a day-to-day perspective. And then maybe have to dampen your additional opportunity to travel because this requires a lot more outflow than maybe what you were anticipating.
You kind of hit on some of the specifically financial considerations when thinking about a different kind of mortgage, and there's some different expenses. Do I have to fill the home with furnishings and so forth? But what are some of the other variables like this? You mentioned insurance, taxation, property taxes. Are there a lot of other variables that you think are we need to be thinking of in terms of maybe it's an HOA fee or something like that?
What would be some of these other considerations that people need to be mindful of? Sure. HOA fees are absolutely one because, you know, there's oftentimes not too much restriction when it comes to how quickly they can increase those on you. Also too, what if it's in a 55 and up community, for instance? Are they going to allow your children or your family when you're not there to comfortably be able to use it? What is the proximity to your home? How easy is it for you to get there?
And have you then budgeted in the cost to travel to and from the place? Oftentimes people in Hawaii, when they land, they all go to Costco and they fill up and that's kind of the thing you do. But what if you're out in the middle of Montana and it's the middle of winter and now you're kind of stuck out there? So there's even just beyond the cost of furnishing the home, the cost of proximity, you know, you have to think about it from what is the end game as well.
So what if you buy this home and now I change my mind and I don't want to have a second home anymore? Well, what is then the cost to get out? What type of a market would you be having to then sell this property in? So there are so many things to consider, but the good news is that's where having a financial plan in place to run these different scenarios, to add these different expenses that can really help you understand, is it worth my money?
And can I justify it with what I'm trying to accomplish? You know, even cash buyers who aren't worried about the mortgage for a second home, for example, they're pretty good at calculating their taxes, their HOA, their expenses, and they always seem to forget those things that happen, that we all know that happen. Those what ifs, like, oh, I'm buying a house. How old is it? Oh, it's 20 years old. Original roof, original AC. Right.
Yeah. And so they don't- You got two houses to deal with those big home improvement costs, right? Yeah. It's going to happen if you plan to own this second property for a period of time. Always. And don't think you're getting out of it if you buy a condo or a villa or a co-op, even though you're not handling the replacement of the roof, you're going to receive an assessment for the cost. Yeah, for an HOA cost.
Yeah. And then there's the trouble of what happens to my house when it's sitting there vacant? Meaning, if I have this repair, if I have this, if my AC goes out, who am I going to turn to, to help me? And am I going to get a reasonable cost of repair? So there's a lot to think about, not just the predictable things, but the what if this happens, how am I going to handle it situations?
Yeah. Including, even if you are thinking you're going to, and you're able to rent it, Airbnb, or with one of the local realtors, what happens when you get that bad tenant? Because if you rent long enough, you're going to have that frat house party there. Yeah. And the house isn't going to be ready that next Saturday for the next person coming in without someone intervening and fixing it, so to speak. Also, you hope you have a good management company helping you.
So if you do decide to take the route of the Airbnb, and you did have that awful renter, which hopefully eight out of 10 times, you're not getting that renter. People tend to have better luck than not, but it also depends on the location and the type of people that you're renting to, and also the price you're renting for.
So if you tend to go and you say, I want to buy this vacation home, I want to rent it, and I'm going to only be able to rent it for a lower rent, then you have more opportunity to be able to open the door to a wider range of people. Whereas if you're putting a lot more money into it, and it's expensive, and the cost to rent something is a lot more expensive, then there's going to be a smaller amount of people that you're renting to.
But that could also mean that your repairs are going to be a lot more because your house is more expensive. And then management companies, they're going to be anywhere from about 10 to 30% on average for a rental home. So think about when you live in your own home, you start to understand the quirks of the home and, okay, maybe I need to be mindful of this drain or that shower. In a vacation home, you're not spending enough time to know that that's a consistent quirk.
That's a consistent thing I should be mindful of. And so, I think about a property is, of course, it's an appreciating asset, but it comes with an expense. So whether that's a cash purchase, whether that's the unforeseen, I need a new roof, I need a new water heater. Am I going to be able to get the reliable guy or girl at the time to be able to fix this properly?
So typically, your investments aren't going to call you in the middle of the night and say, hey, I need you to pay X amount of dollars for me. And so that's kind of where the trade -off can lie is, is your money best spent elsewhere where you still get to go enjoy and travel, you still get to do all of these things, or it's really important for me and my family to have, in consistency, the exact same place for us to go to a year over year. And that's how we want to spend our time.
So personal choice at that point. It's a great point because you do end up with these kind of considerations about the math of the whole story, right? I think we'll talk about maybe the non -math considerations. There's virtues as well. But when you're thinking about this purely as an investment, and in this case, let's say a rental scenario, I can probably get a rough estimate of how does real estate appreciate over time? I can put a rate of return to that for an estimate.
I can probably think in terms of, well, I'm going to maybe generate this many weeks of income or whatever, months or whatever, however you're going to plan for this, whether it's a short-term or a long-term rental. And then you can quantify, okay, I've got these costs, these fixed costs that are going to be associated with it. So maybe there's a yield, a net yield. Hopefully, it's on the plus side. How many times have we all seen these scenarios? It really isn't, right?
There's not a positive net yield. But when you consider, okay, I put this much capital to use, and is that the best rate of return I'm going to get for- Yeah, lost opportunities, right? Sometimes not. Now, I suspect we all have seen people who've done quite well in making real estate a means of creating wealth, right? Yes. They've had a rental property. Maybe they've leveraged it for a new property at some point in time.
We saw that go horribly badly, perhaps, in the financial crisis for a lot of people. But there's also been these stories where, okay, I have this for a number of years. The mortgage gets smaller. I turn around and use that equity to help me fund another property, right? And there's a validity to that. You can do that and make money. But it's very difficult to do if you're not the person who's managing the property, right? Because the costs go up. Yep. Tremendously, yep.
Will you add on that kind of thinking, Britta? Yeah, absolutely. And you have to think about additionally, even above and beyond just a rate of return, is a liquidity standpoint. So what if you didn't do proper planning and now maybe you put more of a down payment down than you can actually afford because you wanted the smaller mortgage and now you have a big liquidity issue and you need this additional money.
It's a lot harder to get money out of a home than it would be to sell something in the market, for instance. And then think about it from an additional next step too. So when you think about it from a legacy standpoint, so you're passing this money onto your heirs. Does this type of a home, does it get put into a special type of trust where it may or may not get a step up in basis upon your passing?
If you haven't decided what will be the next step for the home for your heirs and children perhaps, then now they have to decide and there's two of them and they're torn between one wants to keep it and one wants to sell it. But once again, we have a liquidity issue and we can't afford to buy the other one out. So there's a lot of things that need to be considered above and beyond just the immediate gratification of I have a second home, this is great. It's okay, what is the ultimate spider web?
What is the game plan for if something were to go wrong? What happens if one of my children doesn't want to own the home once I pass away and things like that. So just make sure that certainly not saying don't buy the second home. Cause it's a very common thing, but truly define like what are your goals around this home and what are the what ifs that need to be factored in before making that big decision? Jeff and I are both- I know, go ahead.
Jump on this, go ahead, Jeff. Well, certainly we see too many spider webs and opportunities for family strife and estate plans when a home, typically a vacation home is given to a group of people because the parent or grandparent or whoever passes has this wonderful vision of the family gathering there and sharing it equally and just making so many memories there and it continuing on and on forever.
But even worse than that, which that scenario is good, but even worse than what usually happens is when a buyer, whether it be Chris and I say, hey, let's get this. We can't afford a vacation house in Aruba individually, but let's buy half. Or siblings doing it or whatever combination of people and everything's great for that first month, of course. And we all see what happens when people wanna sell or there's a big repair. Just please don't do fractional ownership.
Don't do fractional ownership because that's one of the hardest things. No matter how much legal documentation you have on paper, there's still always gonna be that emotional side of it. You have to have the conversation around what happens when. There's only so much contingency planning that you can account for when it comes to adding additional people to the decision. So, once again, not deterring you to buy the vacation home. It's just- And it sounds like we are.
I wanna jump in too, cause I wanna join on this too. We see this so often with parents who have this vision and the vision is that our family will have some great times together. And when we're gone, we'll continue to have those great times in the house. And they might even think, oh, we'll set aside some funds to help pay the expenses. But the reality of it becomes, it can become a source of dispute and disagreement.
Oh, my kid's one lives down the street or like a half hour's drive away, they can get there all the time. But then there's that one on the other side of the country, never gets to use it, but has to pay equally. And there's the one who's really well off, they're doing fine. And then there's the one who's like really scraping by and needs the money for paying for their kid's tuition. Or they move into the house. Or they move into the house for the dinner, yeah.
So, you run into these snares where the mind's eye of the parent leaving this asset is how wonderful we'll continue these great family times. Our family's different, we get along so well. But it can be a source of dispute. And God forbid it doesn't end with that generation, goes on to the cousins later on, forget it. You know what I mean? So, deal with this in your estate plan. Give thought, have some family conversations about what would happen, who, does anybody want it?
You know, that kind of thing. And the practical reality is it can't be everybody. No. That's a reality. Yeah, I worked for a trust company for six years prior to coming to Wealth Enhancement Group. So, I saw this firsthand day in and day out when it comes to, you know, when the glue of the group is no longer there and they have the exact same thoughts, my kids will never fight. Well, what if everybody wants it for 4th of July? And there's only, you know, three bedrooms and there's four families.
And then also to think about now this, typically you'll have to have a trust set up to then help pay for the expenses. Trust is gonna get taxed at a much higher rate than what it would be if they outright owned that money. So, there's a lot of things to really consider. And you mentioned some of the capital gains, implications, all these other variables.
You know, I wanna go back to though, you know, all these complicating considerations, but that doesn't mean there isn't virtue in having a second home that you can enjoy for yourself, you can enjoy for your family as like facilitating opportunities for family times. You know, I don't wanna have it be that there's never a reason you'd wanna have a second home either.
We're just saying, don't think that this is something that should last for generations in the way you think about the planning around this. I can testify that owning a second home was a wonderful experience. Lisa and I bought one in the early 2010s after the depression of Beachfront Condo in Florida. We would come down, still working full time in Massachusetts, obviously. We came down whenever we could. We had family use it. It was wonderful.
It introduced us to an area that we got to know and like. And we ultimately decided to sell the condo and, you know, build a house eventually here. And- Relocate. It was a easy, to your earlier point, Britta, we knew the area. We knew what we would do. So we were introduced to the area on vacation, after vacation, after vacation. And we sold it at a nice profit and all is well. It can happen. Yes, absolutely. It absolutely is. And, you know, that's why it's a common thing.
And that's why we're talking about it today. But oftentimes, you know, depending on your financial situation, of course, you know, most of the time people end up needing to use this to rent. And once you start bringing in other people, whether that's we're going in on the property together, I require renters to pay for it. That's when things can get a little bit trickier.
And if you don't have those family conversations about what is going to be then the best use of this when we're no longer, then that's where things will really start to get a bit hairy. So, but yeah, no, you going down and learning that you love this spot. I have some clients right now that that's what they're in process of doing. And it's really fun to help them plan for because it does make sense for them based on what their goals are.
And I think a lot of times these kinds of goals can really motivate people in their development of their financial wellbeing, right? There's the element of it's a motivator for investment and savings. It's something that they get excited about. But do your financial plan. I think we'd all agree. It's important to go in with your eyes wide open of what the costs will be. Do some thoughtful deliberation around this before you just go off on a tear, that kind of thing.
And ultimately, real estate can be a source of wealth, which is good. But to your point, Britta, it is not liquid. And it is important that you have other resources to meet your needs should you run into the issues that inevitably come up for need for cashflow and so forth. Yeah, I always too, I'll say, think about a really nice hotel or an Airbnb that you would like to rent out and just research that online and calculate what the cost of that is.
So let's say it's 2000 for the time you're going to be there. And then compare that to the 12 month or every single month when you have the mortgage, is that actually going to outweigh that? And do I really need to keep my skis locked up in a closet for that additional 11 month cost? So just all of those kinds of things always give you that flexibility. That's a great point because we often hear, oh, you're better to own than rent. But not always.
It doesn't mean that your money is just sitting in cash. You can still get a conservative growth rate on your money and it's still going to be there for you. And if you say, I need that additional 2000 every so often to go buy and to stay in these places, then let's plan for that. Let's create that income, which is going to be way less expensive. And once again, your investments don't have an HOA either. Yeah, that's a great point. Or a new roof.
We're going to wrap up, but before we do, normally I start off with a little get to know you. And we were so excited to get into the topic, we jumped right in. But tell us a little bit about your practice before we're done. Sure. Okay, so we're based in Coronado and we're about, actually, we're about 800 million under management. So it's, and I will say, being in Southern California, rental properties are a very common thing for clients.
They are becoming less common just because of some of the restrictions. We're actually bringing on a brand new advisor that's going to start in about a month or so. So there's three of us out there right now. And my current business partner, we've actually known each other for quite a few years before working together. So we have a lot more of kind of that family feel in the office.
And if you ever decide to come to Coronado and you want to work with us, we have our annual summer yacht at the Coronado Yacht Club, client appreciation event. So that's always a good time. Just a great way for everyone to just get out. Just a great thank you and get to see one another. Who's your ideal client? Oh man, somebody that's nice. Somebody that wants to work together. Yeah. But so no, I would say our ideal client is really somebody that's looking to step into retirement. I am retired.
Somebody that tends to have some estate planning needs and also to a lot of help with like tax mitigation. So being in California, once again, we focus a lot on that legacy planning. And then once again, if you're, you know, just the nobody that's high maintenance. No, I'm just kidding. But you know, I think it's a lot. We really like clients that are open-minded to being creative, that like the idea share. And those tend to be the type of clients that we really work the best with.
Okay, terrific. Hey, thanks for being with us today. Great job. Appreciate the help. If you need help with your financial planning or portfolio management, reach out to Wealth Enhancement. Thanks for being with us today. Take care. AMR-info at wealthenhancement.com. You're listening to Something More with Chris Boyd Financial Talk Show. Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only.
Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.