Is Saving for a Second Home in a High-Yield Savings Account a Good Idea?

August 5, 2023

If you’re saving for a second house with a timeline of seven to ten years, a balanced approach of investing part of the money in low-cost index funds and keeping the rest in a high-yield savings account may be a suitable strategy to achieve your goal. However, consider factors such as flexibility in the timeline, real estate market conditions, and the potential challenges of owning a second property.

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Moving on with some questions, Mark asks, “What are the money guys’ thoughts on saving for a second house in a high-yield savings account for seven to ten years, or would you dollar cost average into the market and pull it out when needed for the second house purchase?”

Alright, Brian, I’ll start this one. I’m going to assume that this second house you’re meaning is for yourself, like a vacation property, like a beach house or lake house, something like that, not like an investment property or something like that. I have my own personal biases when it comes to owning second properties or multiples. I’m not going to speak to that, but if you know that your timeline is seven to ten years out and you know that’s a goal you want to achieve and accomplish, I don’t think that it’s an either-or on this question. I don’t think it’s, “Okay, do I build cash for a down payment, or do I dollar cost average into low-cost index funds inside of a brokerage account?” If it were me trying to save for that goal, I would probably do both. Because 7-10 years is far enough out that it allows me enough time to let my dollars work. Now, I don’t want to just go all the way out there and have all the dollars that I’m planning on using for that capital expense in the market. But I think it’s okay if I had half of that money there, and then the other half that I’m building in cash so that I can make a down payment, or if I’m building, I can begin searching so that way I have some options and some choices as I move closer and closer from that seven to ten year timeframe into that three to four to five-year timeframe. I’d probably do a combo of both.

I love – we really do share a brain because I’d already written down “balanced.” I was already thinking 50-50. So I’m like, that government, he just nailed that thing. So way to stick the landing. But here, there are two things that immediately also popped into my mind. I would challenge Mark. I want to know how firm are you on the seven to ten-year time frame because that’s the part that gives you the freedom to actually invest a portion of this. Because I don’t want you to tell me seven to ten years, but then you’re willing to, if the right deal came your way, you’d be willing to jump in three years because that’s a completely different scenario. And I even want to cause a little chaos in this discussion by saying real estate is one of those things where a lot of times you will get your best way to have appreciation. Now, a second home, hopefully you’re doing this for these great memories you think you’re going to have because this is not an ideal financial situation. I’ll get into that in a minute. But if everybody’s doing everything they’re supposed to on the financial order of operations, steps one through seven, and one of their big long-term goals is in Step eight to have a second home, I’m all for it. But be aware that a lot of times in real estate, secondary homes are the first houses that, if we hit any type of chaos in the financial markets, unemployment goes up, real estate will get beaten up, and the first homes that typically hit the markets are those secondary homes. And guess what that means? When everybody dumps their houses at the same time, their vacation properties, lots of volatility in that pricing. So always part of this balanced approach is that I would probably be thinking about this and maybe instead of a 50-50, you want to do 60% cash, 40% investment. It depends on really how flexible you are on the timing. Just because you need to be prepared if you’re really dead set on this and to not just set seven to ten years but pay attention to valuations because real estate, especially on the vacation homes, you can have wild swings. I mean, right now, everybody’s feeling fat and happy and very proud of their decisions. Think about the state of Florida. If you look at coastal property and other things in Florida, they have made a fortune. But if you go back to the financial crisis of the Great Recession, it was not even 2008, it was not 2009, it was really around 2010, 2011, is when you saw it really hit a crescendo, which is well beyond when we had the financial crisis. But that’s when everybody – you couldn’t give away real estate in Florida back during that time. So it’s just that’s what I would pay attention to – how hard that seven to ten years is versus is it three to five years if you have the right deal because that will impact your allocation. And then realize also, the research shows, and I hate to be the cold water – if you go look at Dr. Stanley’s research, “The Millionaire Next Door,” a lot of times he talked all throughout that book that rich people don’t own boats, rich people don’t own second homes. It’s just be careful. And then I always challenge people from a behavioral standpoint: Do you really want to go on vacation in the same place every year? Because I’ve owned a vacation property that I owned it with a few other CPAs and a dentist, and we thought we were going to make a gazillion dollars on this thing back in Florida. And then we thought, you know, because in the brochure, you think you’re also going to take your family down there and it’s going to be paid for. But the reality is you never get to use it during peak times. The times you do go down there are off season, usually repairing all the things that people who are renting your property have torn up. There are just a lot of things that I want you to look beyond the brochure and make sure this really is what you want to do. Because if you want to own a secondary home, don’t I wouldn’t think about it in the Airbnb way. I would think about it, can I own this house outright? Because if I ever buy another vacation property, it will not be rented because it was just for you, yes, in my family, just because in my family because if you have to rent it to pay for it, it’s – I mean, some people are going to tell you, “I’ve made a fortune off of this,” and maybe you can, but I’m here’s – when I knew that I wasn’t set for this, two quick stories. It’s – we’re already five minutes. The mattress pad, I put a mattress pad – I think a good mattress pad is important to put on a bed. Super important. You think that until they steal it, and then you’re like, son of a gun, they stole the mattress pad. Who steals a mattress pad? That’s gross. Why would you steal it? Then you put in nice pillows, and then you go down there, and you’re like, they stole the pillows. You’re like, son of a gun. And then, you – a couch should last five years. You would think a couch would last five years unless you put it in a rental property, and you’re like, were they wrestling off this thing? Were they jumping off of it? Because the couches have to be replaced every one to two years. And then here’s the – here’s the final nail in the coffin for vacation property. We had a leak in the commode where it was a drip, drip, drip leak. Okay, you would think the cleaning crew – the cleaning crew would probably report this. No. You would think one resident or a tenant that was renting the property from you, they would report that this thing had a drip, a drip, drip leak. Nobody reported. I guess they’d all just put a towel down while they were there. Well, guess what happened over time? This turned into black mold behind the door. Do you know how expensive it is to rip out walls to repair a drip? A $20 repair turned into a multi-thousand dollar repair. This is the type of stuff that happens with secondary homes. I know I sound like cold water, and others could be – people would be like, hey, Brian just doesn’t like real estate. No, I love real estate. I’m just telling you, learn from the guy who’s been there, done that, and make sure you’ve measured twice, cut once, and do this for the right reason. And look, if you stole his mattress pad, his pillows, or you gave them back, please, man, can you tell the anger there? You give them back next time you go to a vacation rental and you sleep by, man, this is the most uncomfortable mattress pad I’ve ever laid on, or the pillows are flat as they can be. It’s because all the people before you that have stolen it that have made that landlord or the person that owns this because I can’t do this because these weirdos just steal the stuff. For more information, check out our free resources.



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