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The second home market slipped last year, but not so much that second home buyers should be alarmed. Main Street remains a better investment than Wall Street.

Even as the National Association of Realtors was reporting the 359,000 single-family second-home sales in 2001 represented a nearly 5 percent drop from the record 377,000 sales in 1999, the median price of a second homes was up 26.8 percent during the same period.

Meanwhile, since the dot com meltdown that began more than a year ago, stock market investors continue to take a beating as the DOW can't seem to hang onto 10,000 and Nasdaq languishes around 1500.

On the other hand, ask any investor who purchased and held onto both a home and stocks a few years ago which investment has carried them through unemployment or other hard times.

"Make no mistake, the second home market is extremely hot and will be for some time to come," said NAR president Martin Edwards Jr.

Edwards said the typical second home now costs more than a primary residence in many locales as the median has risen from $127,800 in 1999 to $162,000 last year.

The recent second home sales let down followed a recessionary economy which curtailed discretionary spending for many big-ticket items. The slowdown followed a second home boom spawned by favorable personal income tax law changes, a growing number of baby boomers reaching retirement age and the longest economic expansion on record, driven largely by the technology sector. Many buyers gained admittance to the second home market with equity gained ducats from their first homes.

As the economy gains steam again, a second home purchase is a natural investment for a nation wary of terrorism alerts and stock market doldrums as buyers look for a secure home away from it all.

"Most people end up living and retiring in their second home, which makes it a great value because if they end up selling their primary residence, the value (of the first home) typically exceeds the cost of the second home and they can pay off the second home and live off any extra money," said Ken Brunt vice president of Orinda, CA-based EscapeHomes.com, the Web's leading portal for second, vacation and resort homes as well as time shares and similar investments.

Current market conditions of reduced demand, but low mortgage rates make it a relatively good time to buy -- for now. Limited inventories in all housing sectors will likely drive up prices as second home buyers return to market with the strengthening economy.

"Nationally, we've had tight housing inventories generally. Professionals specializing in recreational property say there aren't enough vacation homes to meet demand in many areas, causing prices to rise sharply," said David Lereah, NAR's chief economist.

"The availability of vacation homes is reported to be especially tight in coastal markets," he added.

The survey doesn't provide a geographic breakdown, but anecdotal reports from recreational property sales people say oceanfront property in the mid-Atlantic region doubled in value between 1997 and 2001.

"The strong second-home price increase over the last two years reflects exceptionally strong demand in the more desirable locations," Edwards said.

That's not true everywhere.

"There are still a number of undiscovered vacation destinations where the housing prices are a steal. EscapeHomes has some of these towns listed," says Clark Thompson, CEO of EscapeHomes.com.

To get the most bang for you buck in a second home, there are some specific considerations. That includes not forgetting that you likely aren't in it just for the money. A second home is also a lifestyle choice. Choose one based on your personal desires, for starters.

Otherwise, important factors to consider include,

  • Financing.Shop around for the best deal on a second home loan, which are just as competitive as primary home loans, though with tougher qualifiers. Lenders know you'll have two mortgages and, if you get into financial difficulties, you'll likely let the second one go first.

    Shop lenders or brokers with branches in the area of the second home or who are familiar with the community. They know the market and can price competitively. Don't overlook seller financing. Older owners often own properties free and clear. Some need extra income and are willing to carry a first mortgage.

  • Timing. Virtually every real estate market has a seasonal ebb and flow when buyers are scarce and purchase costs drop. Paying as little as possible on real estate investments is key to profitability.
  • In many areas, the slow market begins when schools open and families want to stay put for continuity in education, friendships and community

    Other areas slow to a crawl when the winter's snows arrive, while in sunny climes that could be the start of buying binges.

    Don't overlook economic timing.

    Real estate investors who watch market indictors, much as stock market investors watch the bulls and the bears, can buy and sell investment property with the acumen of a shrewd day trader, says Robert M. Campbell, a San Diego-based mortgage and real estate broker, who publishes the Web-based San Diego Real Estate Report.

    He says periods of increasing foreclosures, rising interest rates, falling home sales and slack building permit applications can be good times to buy and hold while everyone else is selling.

  • Location. Obviously, location is as important to a second home's value as it is for any home. If you aren't choosing a new home in a resort or development where prices are relatively fixed, shop for a second home much in the same way you shop for your first home. For value, buy the cheapest home in the best block or buy into the cheapest neighborhood in the best community. Also look for the potential for appreciation, typically found in areas where demand eventually will exceed supply. Avoid heavily marketed, but unproven areas. You want property with future marketability for you or your heirs.
  • Location is also important in terms of your home's proximity to the activities you want to enjoy -- shopping, night life, recreation, culture, and others. The best second homes are those within easy traveling distance of your primary residence. If it's too far or too expensive to reach within a few hours by car or plane, you likely won't use it enough to warrant the purchase as an owner-occupied second home.

    "The idea is to make it accessible. It's not "Oh, I went to the Bahamas and it's beautiful so I'm going to buy a home there." Make the location within a three-hour drive or one=hour flight so you'll visit it enough and get your money's worth," said Brunt.

  • Taxes. Talk to a tax professional before you buy a second home to determine any exposure to taxes that could undercut your investment. Thanks to the Taxpayer Relief Act of 1997, married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on sales of homes used as a principal residence for two of the prior five years. If you live two of the five years in your second home, the same benefits apply, provided you sell only one home in a two-year period.
  • Mortgage interest is also deductible, up to a maximum of $1 million in mortgage debts secured by a first and second home. Points, property taxes and uninsured casualty losses are also deductible with certain limitations.

    It gets tricky if you try to rent your second home.

    You can rent your second home for any amount, tax free, for 14 days or less in any calendar year. You don't even have to report the income.

    Once you rent the property for 15 days or more, it becomes an investment property and a complex set of rules apply based on the type of housing you buy and the amount of time you rent it.

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