Post Boom Second Home Buying Strategies

By Broderick Perkins

January 9, 2007

Buying a playhouse isn't a game.

Economic market conditions shifted in vacation home buyers' favor in some regions of the country last year, just as the traditional winter weather season took still more heat out of the second home and resort markets.

But that doesn't mean vacation home buying is a breeze.

Just ask some late-to-market speculators who lost their shirts as the last boom faded. Other investors saw their cash flow become cash slow as speculators fled. Still others made buying mistakes that put their second shot at the American Dream, physically out of reach.

Buying a vacation home as an investment or rental property requires the same careful forethought necessary for any investment as well as professional assistance where warranted.

"Read up on the subject so you'll know what to expect. Doing plenty of research and making an educated decision will keep your vacation home dream from turning into a nightmare," says Christine Karpinski, director of Owner Community for HomeAway.com, an online vacation home rental marketplace.

"Buying a vacation home, especially one you're going to rent out, means embarking on a whole new lifestyle," said Karpinski, also author of "How to Rent Vacation Properties by Owner" (Kinney Pollack Press, $26).

For those taking the second plunge, here's what to consider.

Bubbles are full of air. One of the reasons some markets are favorable right now is largely due to fleeing speculators taking the air out of bubble markets where values were artificially inflated and the market oversupplied. Consider more established areas where the shorter supply lets properties hold value and applies a steady upward pressure on prices.
Don't leave your heart in San Francisco if your wallet can't afford the pain.

"It's easy to get caught up and sign on the dotted line when you see that gorgeous beach home or perfect ski resort. This is especially difficult for vacation homebuyers because we're risk-takers who tend to use our emotions more than our heads," said Karpinski.

Buy where you can host renters. Even if you have no intention of renting your property right now, you may have to later. That means buy in an area where you can rent your property should the need arise. If you don't and you hit an income bump in the road, selling may be your only options. A growing number of vacation property investors are finding community pressure against short term rentals. Bans on short term rentals could turn a planned investment into a white elephant if rental income was figured in the return.
Consider renting by owner rather than using a property management company. HomeAway, Inc. surveys report the average weekly rate collected by vacation property owners is $1,656 and that rent is collected 20 or more weeks each year. That's enough to generate more than $750 in positive monthly cash flow on a mortgage that costs $2,000 a month. The cash flow doesn't include reoccurring costs, beyond the mortgage, including the cost of property management which can put a real bite on cash flow. The income also doesn't take into account the tax benefits associated with second home ownership.

"The Internet has made renting by owner much easier," says Karpinski.

Consider property near enough to easily and quickly get to for your own vacation needs and for maintenance, upkeep and other reasons you may need to visit. Otherwise travel to you dream home could eat into your profit.
Consider renting your property for 17 weeks and your new vacation home will pay for itself (including mortgage and other costs) if your monthly mortgage payment is less than or equal to one peak week rental, says Karpinski. The remaining 35 weeks are gravy or lots of getaway time.
Buy down time. Take some of the gravy as your own. Buy property that will pay for itself and then some so you have the option of enjoying a getaway playhouse in a world where woe is the norm rather than the exception.