By Winter has a very powerful effect on memory. Now, I’m not a neuroscientist, but after many years living in a cold-weather state I’ve learned this to be true.
Every winter, after the first major snowstorm or deep freeze, I hear people ask, in a perplexed tone, the same question: “Why do I live here, again?”Just like that, they forget their family, their careers or businesses, their homes, their neighbors, their favorite hangouts, the natural beauty and cool cities around them, the crystal-clear lakes, the fishing and hiking, and all the other important and attractive reasons they live where they live.
Many people though get tired of asking that question. As a financial adviser in Michigan, working for a firm that has many clients in the Midwest, a common financial goal I see from couples is the desire to become snowbirds. That is, they want to buy another home in warmer climes in which they live during the winter months.
Buying property is never a simple decision – even if it’s just a vacation spot like a small condo or apartment. There are many financial considerations to ponder before signing the papers. Fortunately, there are tricks to help you determine whether becoming a snowbird makes financial sense for you. Here’s what to know before you take flight.
Know ALL the costs
As with any large purchase, it comes down to your ability to afford it. If you plan on owning a second home, consider all the costs in addition to just the mortgage – taxes, insurance, upkeep and long-term improvements. What does that work out to as an average annual cost?
A trick to determine if you can afford a second home
Once you calculate the total cost, work it out to an average monthly cost. Now spend the next 12 months saving that amount from your regular cash flow. If you can’t save that amount each month, you can’t afford the second home. If you can afford it, use the money you saved to put toward your down payment or move-in expenses.
Understand the risks
Keep in mind that many second homes are in planned communities such as vacation, retirement and snowbird communities. Home values in planned communities can be more volatile during real estate market fluctuations. Be careful that you’re not getting into a second home that’s significantly overpriced because of short-term demand.
Establish your primary residence
Snowbirds need to be particularly careful when establishing their state of residency for tax purposes. Often people prefer to claim the lower-tax state, such as Florida, as their state of residence. You must prove that you spend more than a certain number of days in that state. (Residency rules vary from state to state.)
Get a driver's license and register your car there. Vote there. Bank there. Keep utility bills that show you're always using gas, water and electricity there. Have other bills and correspondence sent to that address, too. And, if nearing the day limit in the non-residency sate, keep additional receipts at the beginning and end of your time in the state in which you are claiming residency. For example, let’s say you split time between Michigan and Florida and claim Florida residency. Save the first receipt (for a gas purchase, maybe) as soon as you head south and the last one before you return to Michigan to prove you were in Florida more than 50% of the year.
Avoid buyer’s remorse
It might be wise to spend a few months or one season renting in the city or community you want to live. This is a lower-risk way to learn the area and discover whether you want to commit to life as a snowbird.
Owning two homes and spending time in the sun year-round is a great privilege but also a great responsibility. As with all major financial decisions, consult your financial adviser to make sure you’re making the right choices to live where you want to live.
Sean McDonnell is a CERTIFIED FINANCIAL PLANNER™ who provides comprehensive wealth management solutions, such as retirement planning and investment advice, to help clients work toward achieving their financial goals.
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