In every dream home a heartache? #027

The holiday home dilemma

In Every Dream Home a Heartache. One of my favourite Roxy Music songs. 

But is it true? 

Let me tell you a story.

I spent last weekend In Norfolk, Thornham to be exact.  A stunning part of England.  Endless beaches.  Big Skies.  Wildlife. 

And Land Rover Defenders, chichi pubs and Farrow and Balled second homes.

The holiday home dilemma

I was reminded of the dilemma of many of my former clients; to buy a holiday home or not?

Like so many questions in life, and financial planning, there aren’t cut and dry answers. It boils down to being open to smart questions and clear thinking around facts and emotions to understand if the purchase is intrinsically (to meet a truly personal desire and passion) or extrinsically (that’s what people like me do isn’t it?) motivated. Neither is right or wrong, but it’s helpful to recognise who’s driving!

Tell me about buying a holiday home?

I recall asking one of my favourite clients, let’s call her Sarah. She’d seen her dream cottage in Cornwall, a few miles from St Ives, atop a hill, with, if you craned your neck, a sea view.

…It evokes happy memories of family holidays as a child, sun, sea, sand and crabbing… she said excitedly.

How will you use it and with who?

I continued.

…Maybe a weekend a month to escape the city.  A few weeks in the summer. With my partner.  I’ll have friends to stay.  Maybe my niece and nephew, she replied.  It’s only 250 miles away from London, just a 6 hour drive. Or I could fly to Newquay maybe… she explained.

How are you thinking of funding the cottage?

I already knew she had the spare capital. 

She could ‘afford’ it.  The cashflow proved it

…From my portfolio so it’s really just an asset swap isn’t it, and we know property only goes up in value, doesn’t it…she confidently told me.

Unsurprisingly the survey showed the ageing property needed renovations.  It had been battered by the sea air and winds.  It had damp.  But she had plans to extend, subject to planning permission

…So not really a problem…she parried.

Might you retire there?

I probed.

…Goodness, no.  Far too isolated and bleak in the winter…she exclaimed.

Might you rent it out when you’re not there?

I continued, the answer to which detracts somewhat from it being a second home of course.

…Errr probably not…she said, clearly in two minds.

What are the opportunity costs of buying the property?

I gently challenged. 

She pondered.  Dug deep.

…Well, I guess it may limit opportunities to holiday elsewhere. 

I might feel obliged to go when I don’t feel like it. 

I may feel the need to do jobs when I’m there of course. 

And the capital I use to buy it will no longer be in the investment market but who knows which will have the better return over time.

She paused.

It does give me another thing to think about and organize when actually I’m flat out at work most of the time and am actively trying to simplify my life…she nervously voiced.

And, in contrast, what’s the joy in owning the cottage? 

I asked, acutely aware I may have dampened her buoyant mood.

Her face lit up. 

…Exactly that Ruth, joy, relaxation and escape.  A place I can truly relax and kick back in, away from the hurly burly of my everyday life.  Where I can breathe fresh air and just be…she gushed, relaxing.

She left with her thoughts to mull over her decision.

The dull, boring and important stuff

I deliberately didn’t immediately dive into the costs with Sarah as the conversation was primarily an exploration of her motivations but, briefly, as you ask, don’t forget:

• Buying Costs – stamp duty, legals, surveys and furnishings,

• Opportunity Costs of the use of capital to purchase and renovate, versus what could be done with the money instead,

• The cost of Debt and Interest payments (fortunately not an issue for Sarah),

• Running Costs including utilities and maintenance, and of course

• Tax on any rental income generated and capital gains tax on future sale proceeds.¹

Norfolk just reminded me of the Holiday Home dilemma. 

And it was a cracking excuse to listen to Roxy Music. 

You

How about you?  What are your tales, good, bad or otherwise, of holiday home purchases? I’d love to hear from you.

…As for Sarah, my client, did she buy?  Drop me a line if you’d like to find out ;-)

Until next time my friends,

Ruth x

1. Not to mention the complex arguments for and against second property ownership in rural communities, the impact on the local economy, the increase in property prices for locals and the creation of ‘ghost’ villages off season.