Purchasing Another Home Has Its Perks. To Make The Most of Them, Get The Facts Before You Buy
By Farnoosh Torabi

July 12, 2007;
Entrepreneur Magazine
July, 2007

Brian Maloney’s Fort Lauderdale, Florida, second home offers peace of
mind and money. He bought the two-bedroom condo in 2005 after living
in New York City for close to 20 years and running his marketing agency, Maloney & Fox, for 10. “I really felt [another] 20 years would go fast,”
says Maloney, 43. “I needed to have an investment property to retire in,
or at least to have it appreciate.”

His search led him 1,300 miles south to a $650,000 high-rise condo with views of the Atlantic. “I didn’t hesitate,” he says. And while he waits for the property to appreciate, the condo provides a getaway for Maloney and his friends and relatives.

In 2005, both investment and vacation properties skyrocketed to historic levels in the U.S., according to the National Association of Realtors. The trend, says the NAR’s Walter Molony, was fed mainly by speculative investors. These days–not so much. The latest NAR report shows a steep drop in second-home investment sales relative to pure getaway-property purchases, with prices dropping and the speculative buyer now largely out of the picture. While year-over-year vacation-home sales grew 4.7 percent in 2006, investment-home sales plummeted nearly 29 percent.

The good news for investors is that there are now more choices and a growing population of desperate sellers. In fact, 10 percent of second-home purchases in 2006 were foreclosure or trustee sales, according to the NAR. On the flip side, buying a second home hasn’t gotten easier. Experts urge buyers to be more patient, observant and prepared when it comes time to apply for a second home loan.

The bottom line, says Esther Muller, president of The Real Estate Academy: “People are thinking about second homes more intelligently.”

Location, Location, Location

While Florida has been a top destination for second homes, at least for
East Coasters, purchasers today increasingly consider alternative locales. One reason is that, “property insurance on the Atlantic Coast and Gulf
Coast has skyrocketed because of natural disasters,” says Greg McBride, senior financial analyst at Bankrate.com. Indeed, Maloney remembers the heartbreak after his 10-day-old Mini Cooper was totaled while parked at
his Florida condo during the string of hurricanes in 2005. Damage
insurance on the home costs $1,500 a year.

Still, he selected Fort Lauderdale after noticing high-profile commercial developers breaking ground there, a sign of future appreciation. “If you
see names like St. Regis and Trump [building properties], they’ve done their homework and you can do some piggybacking,” says Maloney. The town is also near a few of his clients, which allows him to occasionally mix business with pleasure.

Rusty Anderson, senior vice president of NorthPoint Real Estate Investment Services, advises clients to choose markets with job and population growth. Hotbed areas today, he says, include Albuquerque, New Mexico; Raleigh, North Carolina; and Portland, Oregon, all of which boast robust rental communities as well.

Paying It Down

Lenders aren’t as open-armed these days, and rightly so, experts say,
amid record-high delinquency rates. As a result, down payments should be no less than 25 percent, credit scores at least 660, and investors should fully disclose their income and savings to facilitate the loan process. Finally, cash is king. Homeowners were once quick to take out home equity lines of credit to pay for additional real estate. But with appreciation levels off from their heyday, it’s best to combine personal savings with a fixed-rate mortgage to alleviate risk. That way, if the investment goes bad, you can count on at least one roof over your head.

Farnoosh Torabi is a correspondent for TheStreet.com TV