'Bubble-proof' your second-home investment

Guest perspective: How not to get caught in a speculator market
By: Christine Karpinski: Inman News
According to the March 2005 report by the National Association of Realtors, a record 2.82 million second homes were sold in 2004, up 16.3 percent from 2.42 million in 2003. Astounding as it may seem, investment property and vacation homes account for more than one-third of residential transactions.

Jack McCabe of MaCabe Research and Consulting said, "An estimated 40-60 percent of the more than 60,000 condos and homes scheduled for completion by 2007 in Southwest Florida are under contract with speculators." Speculators are defined as investors who only purchase properties in areas where they think there will be huge appreciation factors. They never intend to occupy the property, but just want to sit on it during the construction phase and then get out at high appreciation times of build out. Areas where a large percentage of speculators invest historically make those areas more vulnerable to artificially inflated prices.

The last thing you want to do is buy in an area where there are too many speculators. The risks of the bubble bursting and you getting soaked by the burst are much higher in these markets.

All of this talk about a real estate bubble shouldn't stop anyone from buying that dream vacation home. But it should make prospective buyers do a lot more research. Gone are the days of going on vacation and coming home with a vacation home. A lot more homework is required to protect buyers and make sure they're making a sound investment.

Here are some tips for buyers interested in purchasing vacation homes

• Start with a plan: Whether buying for personal use or for investment,you should
  start with a business plan, just as you would if you were starting any new
  business. Confidence in an investment takes a lot of research.
• Buy with your wallet not your heart: Make sure you're buying a smart investment.
  It's especially difficult for vacation home buyers because we tend to use our
  emotions more than our heads. It's easy to get caught up and sign on the dotted
  line when you see that gorgeous beach home or perfect ski resort, why do you think
  so many people own timeshares?
  Because they get caught in the moment and only see the romantic side of ownership
  without doing the due diligence necessary.
• Research the area: Is this a new emerging area? Or is it an older, more developed
  area? This makes a lot of difference. If you are looking to purchase in an area
  that's well developed, such as Cape Cod, then there's less to worry about. The
  supply is so low in these areas that historically they indeed hold their value.
  But exercise caution in an emerging market such as southwest Florida to be sure
  that there are not too many new developments causing inventory to exceed demand.
• Use your real estate agent: Pick your agent's brain. Ask tons of questions, scour
  through his or her Web site and absorb as much information as possible. After all,
  your agent is getting paid to be knowledgeable in this area. Use his or her
  expertise to your advantage.
• Look for large credible developers: Developers do more research than any single
  buyer could ever dream of doing or affording. They sink thousands of dollars into
  researching the market, tourism, growth and inventory. If you follow large
  developers, your chances of failing likely will be significantly less.
• Beware of overextending with "teaser" mortgages: Yes, you can afford that property
  with a 3.5 percent interest-only payment, but be realistic. That payment is likely
  to go up, and maybe faster than you think. Mortgage rates today are still at an
  all-time low, but if you're using an adjustable-rate or interest-only just for the
  affordability factor, watch out, your rates will go up. You might be saying, "I'll
  just sell when the rates rise," but so might thousands of other owners. You could
  be stuck with a property you cannot afford. There is no way of telling where the
  mortgage rates will be when your teaser rate caps out.
• Leave your options open: You might be saying, "I want to buy a vacation home for
  personal use. I never intend to rent it out." Well that is perfectly fine, but you
  can never be sure what tomorrow brings. Today, it may be financially feasible to
  not rent your home but what will tomorrow bring? What will change in your finances
  over the years? Will you be retiring? Will your children be attending college?
  Will the tax rate for the property skyrocket? What about the simple costs of
  ownership? Buy in an area where you know you can utilize the option to rent your
  property.
• Stay away from areas with short-term rental bans: The best way to protect yourself
  from market fluctuation is to leave your options to rent your property on a nightly
  or weekly basis when you are not using it. Some complexes, local, city and counties
  have areas where there are covenants or laws against renting on a short-term basis.
  If you stay away from purchasing in these areas, then you're leaving your options
  open to turn your vacation home into an income-producing asset.
  In closing, all in all I still think that vacation homes are good strong
  investments. If you make well-researched, educated decisions you'll be setting
  yourself up for success, not failure. Smart investing is all about eliminating
  your risks from the start.

Christine Hrib Karpinski is the author of two books on vacation-home investing, "How to Rent Vacation Properties by Owner" (Kinney Pollack Press), and an upcoming new book, "Profit from Your Vacation Home Dream" (Dearborn Trade Publishing).