Welcome to a Word on Wealth, a Stephens Wealth Management Group podcast focused on topics of interest to business owners as well as couples and individuals on the Glide Path to or in early retirement. We discuss topics of interest to you and hope to bring clarity to financial concepts and strategies that impact you in your everyday life. Without further ado, here is today's host.
Sherri: Hello and welcome. I'm Sherri Stephens, president and CEO of Stephens Wealth Management Group, and my guest, Melissa Joy and I are going to talk today about owning a second home. Some people call it Snowbirding, some people call it Sunburning, depending on where you originate. Melissa and I are going to hopefully have a good conversation about the pros and cons of second homeowner. Melissa, why don't you introduce yourself?
Melissa: Hi Sherri. Thank you for inviting me here. I am Melissa Joy. I am founder of Pearl Planning. We're a kind of a little sister company to Stephens Wealth Management, so we work together day in, day out. Our two companies have a lot in common and I'm a financial planner. And I'm also like you, Sherri, the owner of a second home. I can talk about this conversation both in the idea phase as a financial planner, but also in just the how it works in real life phase too.
Sherri: Exactly. as Melissa mentioned, Stephen's Wealth Management Group is a registered investment advisor, and as a wealth manager, we often have these conversations with clients. What are the pros and cons? What do you need to think about? And since the two of us have both been there, it really helps us to share real life experiences, I think, with clients and help them understand what we've learned along the way.
Melissa: Right. Oh, for sure. There is, you know, the idea whenever you go to a new resort area, it's like, oh, wouldn't it be nice? Which there is a lot of really cool benefits, but there are also just some realities and housekeeping that you have to take into consideration as well.
Sherri:Right, and I think sometimes when you originally make a decision and 10 years later, maybe circumstances have changed. Maybe in a good way, maybe not in a good way.
Let’s kind of jump in maybe and talk a little bit about what was your thinking originally. Let's talk first about where your second home is, because mine's a little different. I made the leap to do something in a warmer climate in Florida. Since we're both based in Michigan, my first inclination was to go somewhere warm. Melissa, talk about where your second home is and what were your thoughts to start with and how you came to that decision if that'd be a good idea for your family?
Melissa: Well, we have a second home in Crystal Mountain, which is a resort in northern Michigan, near Frankfurt, and it's about an hour from Traverse City and in the winter, it is a ski resort. In the summer, it is a golf resort and has great family activities as well. It's a location that we have been going to for more than 10 years. We have gone with great friends of the family on ski trips most years since we've all had kids, the last 13 or 14 years. And so there's a lot of really great memories that we have. My husband, Jeff, and I have experiences with larger groups and if you can picture it, it was the summer of 2020 and you know how cooped up everybody had been, and we were not alone in COVID purchases, but we had a week rental in at Crystal Mountain in the summer, which was the first time we stayed on the property during the summer and we're out at the campfire and I was doing one of my pastimes, which was looking at real estate in the areas that I was visiting. And the house that we have now went on the market within the previous 24 hours and so there was a little bit of a campfire inspiration and like, wouldn't it be nice to take a look? And I think we really lucked out in a property in our case, and I can talk about the advantages and disadvantages.
It was a turnkey vacation rental where everything in the house, including the towels, forks and knives were going to be included in the sale as well as bookings. You know, we ended up with both a place to go as a second home as well as a business. And I will say that one of my very first calls was to my financial planner, and that is you, Sherri . I gave you a call and said, hey, here's what we're thinking….my husband and I have different perspectives on money and big financial decisions. I felt really comfortable in the decision. I mean, I still wanted to consider like what could go wrong, but Jeff needs a little more proof. We had another set of eyes look at the numbers in our case and we ended up with a home at Crystal Mountain.
It is a great place to host larger family gatherings as well as our family uses it for parts of the year. And of course we chose it because we can drive there. Our kids are still in school so, you know, that warmer location and kind of getting away for a month or two in the winter just isn't an option for our family right now.
Sherri: Right, well, you have young kids, right? Yeah, and I appreciate that you mentioned that. It's good to run it by your financial advisor because even we do that, or especially we do that because we know it's sometimes when you're really enthusiastic about something new, you want to make sure you haven't forgotten something, which is easy to do no matter who you are.
I would say I did the same thing. You know, I bounce a lot of ideas off you as well so that we can hold each other's feet to the fire and do the things that we advise our clients to do right when we're thinking through things. I guess it's fair to say in your case, you landed at a place that was already very familiar. You knew a lot of the community. You'd been there many times, and so it wasn't, maybe not quite like some of the pandemic purchases for people who left and went across country or did something dramatically different in terms of work environment, life environment. I think that might be a little difference in terms of how you arrived at it for me. We ended up buying a condo on the beach in St. Pete Beach near Tampa, Florida. The area for us is the same sort of thing, meaning we've been going to that area for over 30 years. It just so happens Raymond James corporate headquarters are near there. It's a place that I've been attending meetings for many years, Florida in general, which is pretty typical for Michigan residents. Often clients have second homes there, so I was traveling there to meet with clients in the winter. Trying to get out of the winter months for me has always been a benefit, and additionally, my parents and my in-laws had homes there for many years near there, within an hour or two driving distance.
For me, it was also a place that I knew well and had been going to for many years and always thought in the back of my mind, when I had some time or the ability to hop on a plane and be able to go there for more than just a long weekend that we would probably consider that. And once our kids were grown and we had a little more independence and free time we started experimenting.
Kind of a funny story. My husband is not someone who can turn on a dime. He likes things planned. He's an engineer brain.
Melissa: I think we have that in common.
Sherri: Yeah, he likes to plan things out, he is not very spontaneous. I thought, well if we get a real small place first then if he really doesn't like it because in my mind, you know, why buy something if you're not really going to get down there and use it enough? And I had plenty of justification between work and free time to go. We started with a very small, one bedroom place buried near the beach, but it wasn't crazy expensive, and it was close to all the areas that I needed to be close to. And by that time I was going down there enough where I could justify that. It needed a little bit of remodeling, which is one of the considerations when you're looking at a home is that's often going to be the case and you're going to have to budget for that. But, fortunately, he didn't have to be involved in the remodeling decisions. He didn't care too much about that part. He did acclimate pretty easily once it was all done and ready to go in kind of turnkey. He did decide that it was pretty cool to be able to just pop down there for a you know, four-or five-day stint and get out of the winter months. I was really happy that we could pull that off. Fortunately for us, there's a direct flight both from our area and from Detroit, so it really makes it easy and the same time zone. Essentially in two and a half hours we could be pretty close to where we need to be, which probably is shorter some days then when you drive up North.
Melissa: It sure is. It's three and a half hours for us and transportation does matter, like you've gotta think about how often you're going to use this and would this change other places that you like to go as well. There's a kind of butterfly effect, considerations that I think sometimes people just look at the peaceful setting and I agree with them.
I would love to have a place in Florida to scoot over to right now. But it's important I think, in this discussion to talk about both the highs and lows.
Sherri: Exactly. I think one of the benefits for us that's not necessarily financial, that's a piece that we need to talk about, but the lifestyle choice is not something to discount as you get older and you think about what your life looks like midlife and maybe in your retirement years, we really like to be outdoors. We like to run together, we bike, jog, and I like to do yoga so we're really avid outdoor people. That was an important consideration for us that it really does kind of lend itself to a healthy lifestyle when we can get outside and walk and do those kinds of things. But the financial side of it too, to your point is, how often you are going to travel there because flights matter, and having a car there in our case is pretty essential.
Having transportation, if you did the math of renting a car for a week at a time, as many times as you wrote down, versus having a car there all the time, and what are you going to do with it in the off months? From a financial standpoint, for me, one to consider and it's a condo. You have an association fee attached to the cost of acquisition. If you have a mortgage, of course there's the interest rate.
I would imagine when you were looking at it, interest rates were pretty manageable at the time, which isn't true today.
Melissa: Yeah, I think that the calculation would've completely changed in terms of, this was a circumstance where I ran the numbers. I look at real estate a lot, and it just seemed right. There was a stream of income that could help us absorb the cost. Now, we can get into it in a moment to talk about do you get rich from having a vacation rental ? I would say be cautious when you make your assumptions about what you get. The cost of capital was much lower than it is today, our mortgage rates were lower and that was very advantageous. And I would mention to Sherri in our family's case, my husband loves to play golf and he skis. I am a late learner of skiing. You would never look at me and think, oh my gosh, she must love it out there. But I really do, even though I like the baby slopes. So there was a lot of attraction to the same things, like recreation, outdoors you feel more peaceful and calm in a location like that.I would really start there in terms of there's a lot of considerations but is that time going to be additive to your quality of life.
Sherri: Yeah, exactly in our case also because we had so much family nearby and people. When you have a second home, people tend to visit you. Yes, if you have other friends and family, they come and our kids like to go. They don't have the flexibility to be able to come down more often, so I certainly wouldn't say that it was, that was a primary consideration, but as they get older, probably they can get down more often, but it is nice to be able to have a gathering place for friends and family and whoever will come to visit.
Also, when you own a second home you're going to finance, that is more expensive. Yeah, from a lender’s standpoint, there's more risk there. If you don't live there, there's more risk. And where we are there was a huge hurricane, this last season should have hit directly where we are. Unfortunately, I'm going to say not fortunately, but unfortunately it went somewhere else and it was devastating between that event and the collapse of the condo in Miami a few years ago. Insurance rates in Florida have gone thru the roof. It was when we originally started doing this six or seven years ago versus what it is today is dramatically different in terms of cost, no matter where you think you want to locate. We have clients in Arizona, for example. I can see that they will have different issues in Arizona, which might be around resources depending on where you are in the country, even in Colorado, some parts of the country are still under severe drought and are going to have issues around those resources in Florida, I think it's always going to be weather events and insurance companies’ ability to maintain a presence there. And I think it’s going to be a real challenge. I think during the last hurricane a lot of those people, unfortunately, were not insured in Southern Gulf part of Florida. Which isn't unusual, when it costs that much more, to your home and you don't have a loan, you don't have to, that's just one of the challenges with maintaining your insurance coverage. What else can you think of that is a benefit, because mine is not a rental, but yours is. Having a nice cash flow to come in and help offset some of those higher expenses. Yeah, so being a rental owner, I think is very interesting.
Melissa: It's a business. So when I'm thinking about costs, it's different to ensure a vacation rental, you have rental agreements that you need to maintain with people. In our case, we use. V R B O and some people like Airbnb, you need to market it and figure out how to get it rented and manage that. And then, you know, things go bump in the night. Sometimes a new part needs to be installed in a portion of the house, and we can't get in touch with the maintenance man that we have, we better hit the road because somebody is expecting a fabulous family vacation and they're depending on us to deliver that. In that world, your rating really matters a lot.
Then you look at the revenue and you're like, wow, there's enough for the mortgage and more. But there's also in there the inflationary factors, and a labor shortage. So getting a place cleaned and managed and monitored, all comes with costs. The other thing is people assume the taxes will be similar to what they pay for their home. Real estate depends on the location, but we're in Michigan we're not homesteaded for our vacation rentals. So those taxes are significant. We're doing a lot to support the public schools in northern Michigan with a hefty tax bill and there's a lot of considerations.
The benefit is, in my case, because we bought it, turnkey, none of my heirlooms or the furniture I love are included that will endure the wear and tear of different families using it. So that's a big difference that I've had some people that did a lot of work, and it may have been thrifting, but spent a lot of time and in many cases, money furnishing a vacation rental, and then the first person comes in and the dining room chair is broken. It's like it's not only a pain and frustrating from a financial perspective, it could be emotionally painful because people weren't respecting your property. You have to be careful about your mindset and some people just are not inclined to be comfortable with that.
People that rent out short-term rentals understand there's a lot of like very grumpy, angry people and they may just not be a perfect fit. We don't have as much emotional attachment to this stuff in the house and we've done that intentionally. I have a long list of improvements I'd like to do in interior decorating, but I'll probably wait for when we decide to use it more for personal use and less for the use of strangers in order to do that. But it certainly helped with the affordability, while it's also not a pot-of-gold.
Sherri: Yeah, that makes sense. In Florida, for example, there is no state income tax. It’s one of the things we considered. Florida has a very favorable, no income tax rate, but you know, they get the money somewhere, right? There are costs that are much higher in Florida and so it's not really a given and residency has a big impact, as you just said, on what you pay in terms of property taxes and income taxes. One of the criteria truly, if you're thinking about a second home that may even become a residence, would be to work with a C P A to figure out.
Melissa: The difference, the arbitrage between living in, say, Michigan in a state where a second home would be very expensive in terms of property taxes, while you're still paying state income taxes, or do you move to Florida and come to Michigan less than six months a year and become a resident with lower taxes. There are a lot of trade-offs there, there's no one answer to that at all. It just depends and that would be a really important consideration if you're thinking about changing residency in addition to a second home in a state that might have a much different tax bracket. If you're renting it out, then unless you're extremely limited in the, the number of days that you're renting, you need to plan for the additional tax costs and your time of bookkeeping plus having that income show up on your tax documents in one way or another.
Sherri: Right, so you mentioned that it's a business. How would you recommend people own their property if you have a second home? How should that be titled? Do you keep it in your name or do you think it should be in an L L C or some other entity?
Melissa: In our case, we put it in an L L C, so we had our attorney draft documents and updated our insurance, so that it was an L L C. I'm not an attorney, but I would certainly seek the advice of people that you know can reduce liability. I also boosted my liability coverage. Some of the reasons for that would be just that, right? The liability. If you rent your house and someone has a horrible accident in some sort of lawsuit would happen, I think most attorneys would recommend that a rental property like that not be owned in your own name, and then put in something like an L L C or other structure that would help insulate you from, any sort of creditor risk or liability risk. And I think that's also a consideration.
Sherri: We've worked with clients before who have certainly had the resources to go and buy a lot of rentals. Some have done it for years and years and so there's a lot of cash flow. The risk is there exponentially if you're not very careful and very intentional about how that business is owned from an accounting standpoint, as you mentioned, and from a risk standpoint, from a liability standpoint, really critical, I think, to know. And then I guess one other thing I think about. You have a second home, it's a family gathering place. Everybody has great experiences and memories, and so you want to leave this house in your will or in your trust to the next generation. What do you think about that idea?
Well, I think it's great and it's complicated. It's a source of a lot of family fits and complications. If you have multiple family members who will inherit a property, you know, the assumption that everyone is cooperative is a myth.
Melissa: Yes. Everybody has different financial circumstances, capabilities, and they also have different feelings. One of the things I love the most about a property or a second home is the experiences and the memories where you can get away from the hustle and bustle. We've had Thanksgiving and Christmas with family and great gatherings with friends. But I know so many generationally fraught with the kind of moments that come with properties and if you think the second generation is going to be complicated when you get to the third where the kids are now adults and are all over the country. This was a formative experience and more of this may be a burden, I have other things going on. I just encourage people to be realistic and build in flexibility. But sometimes you can make plans, whether it's a trust for a property or an income, some assets that are set aside to maintain that perhaps can reduce the potential, but everything still involves humans. It does. How about you, Sherri?
Sherri: I've had the same experience. I think it's wonderful as it seems to be able to pass down the family experiences to the next generation. I think it's very hard to think through all the ramifications because to your point, it's really hard to get more than two people to agree on how things should be managed. Should it be upgraded or not? How should we use the money if there even is money set aside for it? Who gets to use it when, there are so many decisions?
I think one of the things that's really important for families is to have that discussion ahead of time. Ever time we have done that with our clients, just encouraging them to talk to the kids and say, here's what we're thinking. We know we all love the family cottage, or the family place, or the family ski house if we left it to you, how would you feel about that? Or some other type of conversation. And I would say in every case, except one that I can think of, it was not going to be a good idea. And it came out right away. And it was the kids' decision because they knew there was going to be a problem, or they just didn't want to worry about it. They didn't want to feel obligated to it. They didn't want to be tied to a particular place. And so I have found that some of the best advice we can give to families in that situation is have a family conversation way ahead of time, because then they'll know and not feel guilty and not feel obligated down the road if you can't take care of it anymore.
Where it should go and how it should work because it's not always so spelled out in documents maybe as clearly as you'd like. For sure, and there's something to be said for having those experiences which are so powerful and really leave a legacy that are tied to that asset, not having to feel a sense of permanency, that you still get the incredible experiences you could create.
Melissa: You could hire a professional to do a video of family memories and for less cost and emotional pain. Give everyone a documentary along with the sales slip if you decided to sell it for what may be right for Jeff and me right now, may not be right for us if our kids live in other parts of the country in 10 years or when we can't take care of it or don't want to take care of it in the future. It doesn't have to be permanent. And I think you'd be surprised at the turnover in second homes because it is a complicating factor. And what's right for right now isn't right for always. You may want to take that asset and do something else with the money.
Sherri: I totally agree with that. I think your point about you may not want to down the road, I mean, when you do have a second home, you almost feel like that's where you have to go.
Melissa: Yeah, when you're going to go on a vacation out of town for a break if you don't go there, you feel like you're kind of burning through money and not taking full advantage. It does kind of tie you down a little bit to a particular place and for some people that might be great in the world today. We're also mobile and people can work anywhere. You know, maybe that's not such a, a big deal anymore.
Sherri: I guess to wrap up then, if we were going to summarize a little bit, why don't you talk about just what's your favorite part about having your second home and what's the hardest part, or if you can think of anything else.
Melissa: I love the experiences and Northern Michigan. I know many of you listening are Michiganders, which is a magical place and having plans for our annual trip with our friends, that's going to happen this weekend. I mean, I wouldn't trade that for the world, but it's a job for us because it is a business and that comes with complications, time, and strain. I know there are very real responsibilities that aren't all just, vacations and good times. I would say, it's messy but worth it right now. I'll keep you posted as to how we feel over the years.
Sherri: Well, I'm just sure for your kids it's really nice to have some family time and a fun place and lots of stuff to do and I agree. For us, it’s kind of the same thing, we get to get away when it's cold, rainy, or dark and get into the sunshine and get outdoors and do some of the things we like to do. That gives me something to look forward to a lot. Fortunately, with a condo, we don't have as much maintenance. There are still things you have to be on top of, but with technology these days, that's a little easier and there's a lot of people around as well as there is a manager there, so we don't have to worry as much.
It's nice to be able to get out of the winter. It's nice to have family down. It is kind of a pain to have to account for things separately, track expenses, keep track of all the one other set of utilities and expenses. Especially when they're far away, you have got to get that work in right while you're also on your vacation.
Well, thanks for joining me today, Melissa. I appreciate it. Hopefully you learned something and thought about some things that you haven't thought about before in terms of being a snowbird or a sunbird. Happy to help you any way we can and thanks for joining us. Thank you for listening.
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