October 6, 2021 – You had a great summer vacation. You found yourself in the perfect beachfront home, the quaint cottage on the lake, or the chalet with exquisite views of the mountains. The family was all together, and discord was at a minimum. It was perfect. You must go back. While it’s fresh in your mind, you send that e-mail of “pure joy” to your advisor, and with as much background as the request to buy 100 shares of Tesla, you indicate your strong desire to buy a vacation home.
The logic usually goes something like this: “Our whole family had such a great time; we would love to go back and spend our future vacations there. On a rainy afternoon, we dropped by a local realtor and found a property that was just what we were looking for. It’s a one-of-a-kind property, and the realtor said we must act fast to get it. Think about all the money we would be saving on future vacations, and we can always rent it out when we are not there, even if it would be a little creepy having someone in our home. What do you think?”
We have had our share of conversations with clients looking to make real estate decisions. They are crucial decisions, given that real estate is usually one of the most significant assets held by our clients. Without a doubt, there is an emotional attachment to real estate not typically experienced with stocks, bonds, or other monetary assets. The emotions that guide feelings about real estate make it so tricky, albeit exciting, to make a sound financial decision.
Luckily, we know our clients and their finances very well. We know their net worth, cash flow, occupation status, and most importantly, their previously stated dreams and aspirations. The numbers will tell us (and them) whether they can afford to buy the home under their current financial plan, or the extent to which they will need to make adjustments. That’s the easy part. The more challenging discussion occurs when the vacation home is affordable, easily financed, and supported by existing cash flow. Why? Because we are dealing with Unintended Consequences.
Unintended Consequences are outcomes of a purposeful action that are not intended or foreseen. Non-economic factors that are both relevant and understandable are often overlooked. Confirmation Bias, the tendency to search for, interpret, and focus on information in a way that confirms your preconceptions, is often the behavioral bias that comes into play. Such biases are stealthy, often flying under your radar.
Experience can help us find clues that might lead to unexpected outcomes:
- Control of Time- do your personal and professional commitments provide the necessary flexibility? Could working from home become a distant memory? What about your family? Children and grandchildren get to school age quickly, leaving only the summer and high-cost holidays as travel options. Travel sports schedules are demanding, and college-age children are more likely to travel with friends on spring break than revel in another family reunion!
- Accessibility- planes, trains, and automobiles can be significant deterrents to your spontaneity. Can you “pick up and go?” Would a three-day getaway be worth the hassle? Can you even get to that chalet during the winter, and is that unique beach town restaurant even open when the leaves start to turn?
- Guilt– the practicalities of life have thrown you a curveball. You spend more time wishing you were there than actually being there. You start to realize that even first-class travel and a penthouse suite at the Ritz would leave you financially “ahead of the game.” While it would be economically justified and logical to “cut bait,” the opposite happens. You have a hard time giving up on your dream plan, especially if it entails taking a loss. This behavior results from loss aversion, one of the most prevalent biases affecting money decisions. You then fall into a state of inertia, a place we all have been when facing a tough decision. Doing nothing is the path of least resistance, but unfortunately, guilt becomes the unintended consequence.
- Emotional Resilience– home ownership comes with financial responsibilities as well a required vigilance that all systems are “go.” Monitoring the heating and cooling, water, and security is required, and your local plumber, electrician, and handyman are always on call. Home maintenance is crucial and time-consuming, EVEN WHEN YOU LIVE THERE! Now imagine that idyllic vacation home location. It is private, peaceful, relaxing, and in the middle of nowhere. Perfect for meditation, but problematic for the fire department. You have connections to “smart” surveillance systems, though you know, deep down, that Wi-Fi often operates at 3G. Hurricanes, floods, snowstorms, and wildfires make the weather channel an information source more crucial than Facebook or Instagram. You pay a bit more attention to the politically charged topic of climate change. You have added another stressor in your life, one that impacts your money, your time, your outlook. Unintended, of course. Predictable, probably.
- Family Dynamics– a vacation home will certainly have an impact on family dynamics. If you think coordinating where the family spends the holidays is problematic, consider the additional factors involved when you want to host your immediate and expanded family at the “compound.” Sidestepping multiple calendar conflicts, assigning rooms to children and grandchildren, expectations that invitees will “chip in” for some of the daily incidentals, or, at a minimum, BYOB will introduce new obstacles, adding a new level of drama in your life.
- Vanishing Legacy– your intentions for a vacation home can be clear and purposeful. It will be your legacy, a place for family gatherings and cohesion. Siblings, cousins, aunts, and uncles will have a place to share experiences and memories that will last beyond your lifetime. However, though your immediate family may be manageable now, we all realize the power of compounding. As the patriarch or matriarch of the family, you manage to keep it together. You can set the rules and act as referee across multiple households of different sizes, living in various locations and with varying financial means. Once inherited by your family, your “legacy” over time could cause significant disagreement among family members on how to allocate access, manage the cost and time of maintenance, and even the possibility of a sale. This situation is a textbook example of an unintended consequence, an unforeseen outcome, and completely opposite of the stated purpose.
These thoughts should NOT dissuade anyone from pursuing their vacation home dream. That is not my intention and would become an unintended consequence! The real message here is to combine your happiness and excitement with a thoughtful consideration of possible outcomes. Inject those emotions with logic and craft a plan to ensure the results fulfill your dream! We are here to help.