Home Sweet "Second" Home

by Dianne Molvig

If owning a home is the American Dream, then owning a vacation home is the American Dream, Part II. It's the sequel--for those who can afford that special getaway place.

Roughly one out of eight homes purchased in the U.S. in 2005 was a vacation home, according to the National Association of Realtors (NAR). The NARs 2006 Profile of Second-Home Owners reports that the typical vacation-home owner is 59 years old, had a 2005 income of $120,600, and purchased a property 220 miles from his or her primary residence.

If you're looking to buy a vacation home--or long to someday--many advisers suggest that you take a reality check first. There's much to consider, says Don Rasmussen, president of CU Realty, a full-service real estate company owned by 72 credit unions in the Minneapolis/St. Paul area. Buying and owning a vacation home is not for the faint of heart at all," he says.

Phil Cook, a certified financial planner in Torrance, Calif., also suggests proceeding with caution. "Buying a vacation home is usually very emotional," Cook says. People see themselves sitting on the veranda, gazing out over the lake. They make all these emotional justifications for an economic purchase. But those kinds of rationales lead to poor economic decisions."

That's not to say you should scrap your fantasies about owning a cabin in the woods or a seaside condo. Just think it through first, on multiple levels.

The financial side

That involves paying not only the usual maintenance and repair costs over the years, but also special expenses. For instance, "If you have a shallow well that goes dry," Rasmussen points out, "it could cost you $6,000 to $15,000 to drill a deeper well."

If you're at your place infrequently, you may need to hire a local, dependable caretaker to mow the grass, plow your driveway, and check on the property regularly. That's an added cost.

Absent owners sometimes encounter another problem. "I know one person with a place on the lake who had a break-in," Rasmussen reports, "and then the insurance company cancelled his insurance."

Vacation-home buyers also must be aware that "the price cycles can be extreme in vacation areas," Cook says. "They tend to be boom-or-bust cycles." He cites as an example a popular ski area in California that had earthquakes a few years ago, after which property prices plummeted.

With such swings in property values, don't count on making money or simply recouping your costs on your vacation-home investment. "If you buy at the top of a market cycle," Cook says, "it could take 15 to 20 years just to get back to even."

About a third of vacation-home buyers paid cash for their property in 2005, according to NAR's 2006 Profile of Second-Home Owners. If you need a mortgage, you'll find varying approaches among lenders. Not all lenders offer vacation-home mortgages. Those who do usually charge the same interest rate for vacation homes as for primary residences. You'll pay a higher rate, however, if you intend to rent out your vacation home for a significant portion of the year (see "Renting Out Your Vacation Home" below).

Lenders typically require higher down payments for vacation homes. For instance, in Rasmussen's area, "Lenders will try to hold to the prime interest rate," he says, "if you can pay 20% down." The 2006 NAR survey found that the median down payment among vacation-home buyers was 27%.

Practical questions

Consider more than finances to decide if buying a vacation home is a wise choice. "Are you sure nothing will change," Cook asks, "in the next 20 years in your personal life or in the area itself? In 20 years are you going to want to be there as badly as you want to be there today?"

This is a pitfall especially for those who think they'll buy a vacation home now and eventually make it their primary home after retirement. "I've seen people who sold their [primary] home and went to live on that glorious place on the lake three hours out of town," Rasmussen says. "They get up there, and a couple of months later they find out they're bored stiff."

Perhaps you now have young children who would love to head out with you to your country vacation home. But once they're teenagers, they may be less keen on going away for the weekend with mom and dad, and your vacation home will sit unused.

Also, how do you feel about the prospect of spending all your vacations and weekend getaways at the same place? "People feel locked into going [to their vacation home]," Cook says, "because they feel guilty if they don't use it."

Finally, Rasmussen advises being realistic about how much time--not just money--it takes to maintain a vacation home. "There's the staining of this and the painting of that," he says. "People want a place to get away to, not a place they have to work to keep up."

A matter of priorities

A vacation home is a sizable investment--both at the time of purchase and over the years as you keep the place in shape. Too often, Cook contends, people are tempted to put the vacation-home dream ahead of more important goals.

"They often skimp on some other things," he says, "that should be more important. They'll say, 'I'll start the college fund for the kids next year.' Or 'I'll increase my 401(k) contributions in a couple of years, so I can buy this [vacation home] now.'"

Still, for some people, buying a vacation home is a smart move. They have the money, and owning a vacation home truly fits with the way they live. "If you have all your ducks lined up," Cook says, "and you have more money than you can ever run out of, then go for it. You can afford that luxury."

October 16, 2006