The Perfect Getaway
Now might be the ideal time to buy a vacation home—as long as you're buying for passion, not profit
For years it was just a dream—a crazy idea they kicked around every once in a while for fun. But last December, after decades of saving their money, John and Linda Mucci took the plunge and bought a vacation home in Florida. And their timing couldn't have been better.
By the year's end, the number of sales of existing homes in the Sunshine State had plummeted nearly 30 percent. And after five years during which the median home price climbed a staggering 84 percent, prices began to decline statewide. The softening market gave the Muccis unexpected bargaining power: They bid $50,000 less than asking price for a "perfect" two-bedroom condo near Naples, and their offer was accepted on the spot. Now they're snowbirds, spending part of the year in Rockland County, New York, and part in Florida. "We feel right at home down here," Linda says. "We love it."
The Muccis benefited from a trend that's affecting some of the country's most popular second-home hot spots, many of which have been hit hard by rising interest rates and overbuilding. Sales of vacation homes in California declined by 37 percent in 2006, according to DataQuick Information Systems. Across the country in the strong second-home market of Martha's Vineyard, sales were down 14 percent, according to The Warren Group, publisher of The Banker & Tradesman newspaper.
But what's bad news for developers and investors may be good news for you. When it comes to second-home sales, this is a buyer's market. So now might be a great time to snatch up that golf course retirement condo or Montana mountain retreat you've been dreaming of. As long as you do your homework first.
Crunching the Numbers
Owning a second home is not for everyone. "A vacation home is a luxury, and you buy one only when you feel you can truly afford it and when you're getting a better value from it than paying for a rental," says Glenda D. Kemple, a certified financial planner in Dallas. If you're looking to spend just a month or two each year at your second home and don't plan on retiring there, you may find it makes more sense to rent. A lot of people buy second homes impulsively—"usually while on vacation," Kemple says—without thinking about the long-term financial demands.
And what are those demands? Experts say that monthly housing costs for both your primary and secondary residences, including mortgages, maintenance, property taxes, and insurance, should not exceed 36 percent of your gross monthly income. As with a primary residence, you can take deductions for mortgage interest and real estate taxes. You also get a bonus tax break: If you rent out your house for fewer than 14 days each year, you don't have to claim the income on your tax return. Rent it out for more than two weeks, and you'll have to report what you bring in—but you can write off many of your rental-related expenses, including maintenance, advertising, and utilities.
Renting is one way to offset the costs of owning a second home, as long as you plan carefully. Investigate the local market, and build in a 10 to 20 percent cushion to cover your costs. "If the monthly mortgage payment on your home is less than or equal to what you can charge for a week's rent during 12 peak weeks there, you can break even," says Christine Karpinski, author of Profit from Your Vacation Home Dream. Rent it for an additional three weeks during the off-season, she says, and you can cover other expenses, such as maintenance, insurance, and property taxes. One caveat: This only works if you manage the property yourself, since property management firms can gobble up 30 to 50 percent of your rental income.
Finding the Perfect Spot
If you're ready to buy but haven't settled on a location, don't make any commitments until you've found your true geographical soul mate. Test the waters by visiting a town you're interested in several times, talk to people who live there, and, even if you're buying from the heart, check to see how property values and taxes have been trending over the past few years.
You can get more for your money if you buy in uncharted territory—places yet to make the list of America's hottest vacation spots. That's what New Jersey resident Fernando Martinez did. After spending five years searching the Jersey Shore, North Carolina, and Florida in vain for an affordable vacation home for his water-sports-obsessed family, he discovered, through word of mouth, an untapped lakefront treasure in Point Peninsula, New York. Last year, he bought a two-bedroom house for less than $150,000. "This is one of the only places around here where you can find a reasonably priced waterfront home," Martinez says. "Now I have 120 feet of my own beach."
Financing and Tax Breaks
There are two types of vacation home mortgages: second-home mortgages and investment-property mortgages. The former applies to houses that are rented no more than two weeks each year, and have similar rates as primary house mortgages. Your debt-income ratio is determined by the combined sum of both mortgages. With investment-property mortgages, the amount of rental income you're likely to generate is factored into your income-to-debt ratio. Most lenders figure in a 25 percent vacancy rate when determining potential rental income, and, since there's more risk involved, interest rates are half a point to a point higher.
No matter where you buy and how you pay for it, just make sure you're doing it for love instead of money. Quick sales and huge profits are no longer a sure thing. But beyond the numbers, there's something to be said for owning your very own vacation getaway. Kemple herself took the plunge recently, buying a condo in South Padre Island, Texas. After renting there for decades, "I finally decided I wanted my own place," she says, "one that I can decorate the way I want to." Just as she advises her clients, she bought it for passion, not profit. "I didn't buy my condo to make money," she says. "I bought it because I wanted a familiar, comfortable place I could come back to year after year. If I happen to make money on it someday, that'll just be gravy."
5 Emerging Vacation Home Markets
1. Page, Arizona: Scenic desert town on the Utah border; $120K fetches a 3-bed/2-bath home with views of Lake Powell.
2. Surfside Beach: Texas Coastal island with miles of beaches and great deep-sea fishing. $135K buys a 2-bed/2-bath home, 2 blocks from the beach.
3. Driggs, Idaho: Teton Valley town with great skiing and fly-fishing; $260K gets a 5-acre lot with mountain views.
4. Salida, Colorado: Historic railroad town at the foot of the Central Colorado Rockies; $300K affords a 2-bed/2-bath home on hiking and biking trails.
5. Seneca, South Carolina: Lovely lakes, Southern charm, and a great arts scene. $300K buys a 3-acre lot on Lake Keowee with 200-plus feet of waterfront.