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Investment in Vacation Homes : Experts Advise Care in Selecting 'Right' Location

First in a series dealing with various real estate investments.

February 01, 1987|DAVID W. MYERS

With interest rates down and tax reform jitters over, thousands of investors are once again considering the purchase of a vacation home.

But before you buy a mountain hideaway or desert condo, experts say, you'll have to do a lot of homework to maximize all the pleasure and investment potential a second home can provide.

Prices in most resort communities have been soft during the past two years, in part because Congress had considered reducing the tax benefits of owning vacation property while it worked on its sweeping tax-overhaul plan.

But the final compromise spared most of those deductions, and prices in many second-home areas are once again on an upswing.

Location Important

Still, experts advise, don't buy a vacation home merely to generate additional tax deductions. "The most important thing a second home can provide is happiness for you and your family," says Bob Flavin, a broker at HMS Realty in Palm Springs.

"Tax breaks and resale profits are important, but they should be secondary considerations."

While the location of any property is always a key factor in selecting real estate, it takes on added importance if you're thinking of buying a second home. Vacation properties with the best investment potential tend to be located near a natural amenity, such as an ocean, lake or mountain that is used as a ski run in winter.

"Golf courses and swimming pools can always be built, but you can't replicate Mother Nature," says Jay Lamont, director of Temple University's Real Estate Institute in Philadelphia.

Ideally, he adds, you should buy the best home with the best view you can afford because it will likely appreciate at a rate faster than less expensive properties.

Another advantage to buying higher-end properties is that the market for them is more consistent. "There will always be buyers for the better properties because there will always be people who can afford to buy regardless of interest rates or tax laws," says Charles Penwill, a sales agent in the winter resort of Vail Valley, Colo.

The market for lower-priced vacation homes is more dependent on which way rates are going. While plenty of middle-income buyers will be in the market when rates are low, their ranks thin out as rates rise because they can't afford the higher monthly payments.

Most experts suggest shopping for a vacation property that's within a few hours' drive of their primary residence. "You're not going to have much fun if you have to drive eight hours each way just to spend a weekend away from home," says broker Flavin. "You might do it for awhile, but it'll get old pretty fast."

Easier to Rent Out

Buying close to home provides other benefits, as well. Homes that are fairly close to metropolitan areas are often easier to rent out or sell because there are larger pools of potential tenants or buyers.

And when energy costs are high, values in nearby resort areas tend to hold up better than prices in distant locations because people travel shorter distances on their vacations.

If you're buying in a planned development, it's important to check out the developer's master plan. Make sure there are adequate controls on future construction, as well as proper design-review procedures.

"If there are no design guidelines, you can wind up with a bunch of weird-looking houses that ruin the atmosphere of the rest of the community," says Fred Trower, owner of Bear Valley Springs Realty in Tehachapi. "Or, a neighbor can build a big house that blocks your view."

If you'll have to pay a monthly homeowners' fee, check out the homeowner association's operating budget and other financial statements.

"Make sure actual expenses are in line with projections," Trower says. Proper reserves should also be set aside for major expenditures, such as the addition of a golf course or repairs of the clubhouse roof.

Some experts say you should be leery of new developments in which promised amenities aren't yet built: They might not ever get built if the developer runs into financial trouble.

"If you're buying in a brand-new community, at least make sure the builder has posted a bond to guarantee that the work will be completed," Trower suggests.

Renting Out Property

It's also important to determine whether the developer will transfer ownership and maintenance responsibilities of the amenities to local residents when the project is built out. If so, you should find out how much your monthly dues will rise when the changeover takes place.

If you're on a tight budget, you might consider renting the property to others when you're not using it yourself. Unfortunately, being a part-time landlord can become a full-time headache: You have to locate tenants, make arrangements to drop off keys and collect rent checks and security deposits.

You'll also have to inspect the property after the rental period is over to make sure no damage was done and the place was cleaned up.

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