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Major Purchases to Undertake for Enjoyment, Not Investment

Contrary to stereotypes or the occasional fears of incoming clients, we as financial planners do not always say “no.”  On occasion, we have been known to tell clients, “You should definitely take that trip to Europe this year,” or perhaps even, “Hey, if you want to, you can retire a couple years earlier than planned.”  There are only two catches.  First, we want to know the implications of a financial move before you take it–i.e., we want to be sure that you can afford to take that move and still meet your other financial goals.  Second, we want to draw a clear line between what is done to fulfill a client’s personal goals and what is done because it’s in the client’s best financial interest.  For example, clients may come into our office with the goal of remodeling their home, buying a vacation home, or buying a classic car or other collectible.   If they plan to undertake these purchases for their own enjoyment (and can afford them), we will encourage and help our clients to do so.  If, however, they view one of these purchases primarily as an investment move, we would advise them to think twice.  As discussed below, while these types of purchases are sometimes touted in the financial media as “investments,” in our experience, they are not the best vehicles for furthering your financial interests.

Home Remodeling.  We have many clients who look forward to updating kitchens, bathrooms, or other aspects of their homes, and we often help to facilitate or advise on how best to accomplish this.  We know updated kitchens and baths can add significant pleasure for the homeowner and are often required to get a home buyer interested when it is time to sell.  And certainly, these upgrades add value to the home (at least in the short-term), but they generally add less value than the cost required to implement them, which is why we wouldn’t consider them an “investment.”  Last year, the Wall Street Journal article “How to Throw Away a Fortune” noted, for example, that major kitchen renovations add less than 75% of their cost to the home’s resale value on average– and that added value declines over time. 

Vacation Home.  Similarly, the financial value of buying a second home (or a primary home, for that matter) does not always outweigh the cost, especially in a short- to medium-term time frame.  Real estate involves high transaction costs when buying and selling, in addition to ongoing maintenance costs, property taxes, and insurance.  You will likely face capital gains tax on the sale of a second home if it has appreciated in value (unlike your primary home for which you have a $250k exemption on gains, or $500k as a married couple).  Renting the vacation home in your absence may offset some of the costs but comes with its own set of challenges and considerations– e.g., whether to rent it frequently and at prime times of the year or prioritize your own personal use; whether to invest time, money, and effort to handle the rentals and upkeep or pay for a property manager; whether current tax advantages may be offset by having to pay depreciation recapture in addition to capital gains tax on the sale of the property.  Finally, you must consider the possibility that the house will not appreciate in value, even over a significant time horizon.  We have seen many properties, especially some bought in the years leading up to the 2008 recession, that have still not rebounded in value above their purchase price.

Cars and Collectibles.  Most car buyers are familiar with how quickly regular cars depreciate in value, declining 44% on average after three years and 66% over six years.  However, some may still view luxury or classic cars as an investment.  Similarly, while some acquire collectibles such as antique furniture and fine art for personal reasons, others view it as an investment.  The problems with classic cars and collectibles as an investment, however, are that you may incur significant transaction costs depending on the manner of buying and selling, and whether they appreciate in value depends on whether there is demand for the piece and a willing buyer at the time of sale.  In addition, for collectibles, you face a higher capital gains tax rate on the sale as compared with other investments (28% instead of generally 15%). 

While some might be tempted to view these purchases as an alternate way of storing wealth unconnected with the stock market, the truth is that the market for luxury items such as vacation homes and collectibles typically shrinks significantly during downturns in the economy and the market.  And at such times, those “investments” may be harder to sell than equities, adding the problem of liquidity to the decline in demand and value.  That is why we will encourage and facilitate clients making these purchases (provided they can afford to do so) for their enjoyment, but not as investments.


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