It seemed so much better than a time share. Terry Moerler and her husband recently joined with three other couples to buy a condominium in San Diego. All four couples will have access to the condo for 13 weeks a year - a getaway where Ms. Moerler and her husband can spend time with their grown daughter and her children. The couples plan to own the condo for five years, and then decide if they want to continue to own it or sell it.
"We bought it for our enjoyment, but there is an investment aspect to it," says Moerler, a Realtor in Thousand Oaks, Calif. "It was important for us to buy something that would have good resale potential."
It's a decision that a growing number of baby boomers are making. Still smarting from the bursting of the dotcom bubble in the stock market, Americans are snapping up vacation homes with fervor. That may be a good financial move, analysts say, if it lowers your tax bill and cuts down spending that would otherwise be used for holiday travel.
But if you're banking on huge appreciation in the value of your vacation home, watch out. The best deals have already disappeared, these experts warn.
"One has to be careful," says Geordie Crossan, a fee-only financial planner and president of NBS Financial Services Inc. in Westlake Village, Calif. It's "kind of like buying stocks at the end of 1999. The best investments in real estate were probably made three years ago. Unfortunately, a lot of people are buying today - after the rise."
The number of vacation homes sold last year soared nearly 20 percent from 2003, according to a study released last month by the National Association of Realtors. That rise is part of a larger surge in second-home sales, which accounted for 36 percent of all residential transactions. Most of those second homes are rental properties. But more than a third of them are vacation homes, used primarily by the owners.
While the West remains the hottest market, second homes on the East Coast are also being snapped up, just not quite as quickly.
The rise in interest rates is slowing the market a bit, says Holly McLear, a sales associate at Prudential Prime Properties in Newport, R.I. But she still sees clients from cities such as Boston, New York, and Hartford, Conn., who want to buy a piece of "the charm of Newport."
"Newport has lots of interesting restaurants, lots of outdoor activities to be enjoyed, whether on the water or the beach," says Ms. McLear. "It's a walking type of town." Of course, she adds, people also buy for the expected appreciation, to diversify their assets, and to have something they can enjoy.
One reason people see second homes as a good investment is the price appreciation of their primary residences. The average price of a home in the United States increased more than 11 percent last year, according to a recent study by the US Office of Federal Housing Enterprise Oversight. Nevada topped the list, with an annual appreciation of 32 percent. Hawaii took second place, with 25 percent, followed by California at 23 percent.
It's those kinds of numbers that have attracted so much attention among would-be investors.
While many people are looking for ways to diversify away from stocks, real estate is quite different from the stock market, Mr. Crossan says. "People are going to have to understand that real estate is an illiquid, long-term investment," he says. "It's not designed for investing in today, and selling tomorrow. Assets, be it real estate or stocks, can't go up [by] double digits, year in and year out, indefinitely."
Many buyers aren't fully informed about all the risks involved with buying a second home, says Lawrence Yun, a senior economist for the National Association of Realtors. But they are still making their own risk analyses, and their own estimates of the potential rate of return.
Mr. Yun says prospective second-home buyers who plan to rent out their property should be especially cautious.
"Rental income has really not grown in recent years," he says. "Many renters shift into home ownership, and rental vacancy rates have risen. With a much higher vacancy rate, a person who is buying a property to rent it out will be facing much heavier competition than before."
If you're thinking about buying a vacation home or investment property, how do you go about it without getting burned?
Real estate experts say an investor should check with a financial adviser or a tax expert before buying.
"Do due diligence - it's your homework," McLear says. She advises hiring a buyer's agent to help evaluate real estate markets because she has seen people making "bad, sad mistakes."
She also recommends consulting with a rental agent before buying rental property.
Vacation real estate also offers immediate financial benefits: the chance to build up equity and lower taxes.
"It's better than a time share - you have something for it. It's also a tax write-off," says Moerler, the real estate agent.
Location also plays a role. Already in California, Moerler chose San Diego as the location of the family's new vacation home because of its easy accessibility by train, its close proximity to the beach and cultural events, and Sea World for her grandchildren.
And while that dream getaway might not bring riches overnight, it's still important to keep the property's future resale value in mind - even if you plan to live in it in when you retire, she adds.
"You want to make sure that whatever you're doing, you're looking at the longer term, so that in the event you do want to sell later, you have something that is more salable than somebody else's," Moerler says.