Include vacation home or 2nd home?

CFA Level III
#1

Hi,

I’m not sure if this was already asked, but does anyone know if we should include the vacation home, 2nd home or property owned in the investable asset calculation for required return?

#2

The case facts will let you know. Default is to add it

#3

so far the default position is not to add it unless the case states the client want to monetize or sell them. the only time to add them is when calculating client’s net wealth/net worth.

#4

I would second that.

A vacation home brings no return, only in terms of non financial benefits of being able to do a nice vacation there now and then. It thus behaves like your residence where your benefit is already included in the reduced living expenses (because you do not need to pay a rent) and that is also excluded from asset base. Therefore do not include it in the asset base.

If you expect appreciation of value it is another matter but it would be specifically mentioned in the vingiette.

#5

Agreed.

A vacation home is an illiquid asset which cannot be invested and does not generate any return. It should not be included in your investable assets.

#6

If illiquid don’t include it in asset base but make sure to list it under unique circumstances if asked to. I would consider it a real estate investment so in case of a subsequent asset allocation question, having a primary and secondary residence would mean high exposure to real estate so less RE is warranted in the advisor-managed investment portfolio.

#7

That’s a good point

#8

Isn’t it technically liquid seeing how if someone needed to, they can sell it whereas their home it’s not liquid because you actually live in it?

#9

If you’ve ever been in the market to buy/sell a home, you’d know that it’s far tougher to do so than buying/selling equities/FIS. Take it as a given that a house (regardless of whether it’s the primary/secondary) is an illiquid asset.

#10

Liquidity means you can buy or sell very quickly without major price concessions.

You can’t sell a house that fast without offering a major discount. And even then, the process will take a few weeks (escrow, inspection…) before they get the $$$

#11

Thanks!