Voices: What to Say to Clients Who Are Contemplating a Second Home

People need to be clear on whether they are making an investment or a personal purchase, says this adviser

Download the original Wall Street Journal article

Scott Upham is managing partner and director of wealth management at Cribstone Capital Management LLC in Augusta, Maine. Voices is an occasional feature of edited excerpts in which wealth managers address issues of interest to the advisory community.

My firm is based in Maine, one of several hot spots around the country for people seeking second homes. I have come to understand the impact such a large purchase can have on a person’s balance sheet, as well as the importance of advising him or her on its long-term implications.

When you approach this issue with clients, the first and most important thing you should do is define their goals. Are they pursuing an investment return through ownership of real estate or are they after a personal return through use of the property?

If a family’s primary goal is to purchase property as an investment, gauge if the family has enough financial breathing room to put a large sum into this type of asset. Most advisers work in a world of relative liquidity, but they must think differently when clients are interested in real estate. Buying a second home will freeze a portion of client assets in the short term. Help clients ensure that this won’t pose a problem in the event of a market downturn or period of hardship.

After considering liquidity, carefully weigh other factors that may influence clients’ financial outcomes. Where are they entering the market relative to historical values? How much time will they have to own the property and let it appreciate? Will they rent it out to generate additional income? Addressing these questions helps you gauge the overall investment value of the second home and whether it represents a beneficial investment for your client.

On the other hand, a family may wish to purchase property for its emotional or sentimental value. In this instance, the adviser’s job is to ensure emotions don’t cause the family members to make a financial move they will later regret.

From the beginning, advisers should help clients take into account a second home’s long-term estate-planning, legal and tax consequences. Determine if and how the property will be passed down to the next generation, as that can influence how current financial arrangements are structured. Leaving property to the second generation can generate an estate tax, so it’s important to know that inheritors will be able and willing to cover that expense. If the property is to be sold after your client passes away, that poses the question of how a new influx of funds will be allocated to surviving family members.

In all cases, tie your guidance back to the goals you and your client established upfront. By understanding the financial circumstances surrounding a family, you can provide relevant answers to their questions about buying a second home. This won’t only benefit their overall financial outlook, it will also help position them as valuable and long­ standing clients of your practice.

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