By Eugene L. Meyer
RISMEDIA, September 20, 2010—In much of Florida, homes have become dramatically more affordable since 2005, attracting new buyers who couldn’t have made a purchase “in the peak years,” says Rei Mesa, president and CEO of Prudential Florida Realty. In Nevada, buyers are snatching up $200,000 properties that just a few years ago would have been listed at twice that price, says Bryan Drakulich, president and CEO of DoMore Real Estate in Reno.
The housing market reflects a paradox of the Great Recession: While some baby boomers are struggling to prevent their primary residences from sliding into foreclosure, others are realizing their dream of purchasing a vacation getaway. Many people “still have a lot of money that sits on the sidelines waiting,” says Michael Saunders, a Sarasota, Fla., broker active in the second home market. “I think the wait is over for them. Anywhere you look, you are going to find prices we haven’t seen since 2001,” largely because of foreclosures and short sales.
However, boomers without disposable income should steer clear of the second home market, even if they believe they can get financing, advises Christine Hrib Karpinski, author of How to Rent Vacation Properties by Owner. “Don’t get yourself caught up in the mess millions of Americans are in right now,” she cautions. “Don’t over-leverage. If you are already retired or close to retirement, that’s not a risk I would take.”
Conversely, for the fortunate who are flush with cash, have high credit scores, and possess sufficient disposable income to make down payments of 20 or 30%, now may be the time to jump into the market. Sharply reduced prices and the lowest interest rates in decades have combined to create a buyer’s market. Moreover, with the stock market in the doldrums, some boomers are finding that purchasing a second home can be a worthwhile long-term investment.
In 2009, the typical second home buyer was 46 years old with a median household income of $87,500 (down from $99,100 in 2007), according to surveys by the National Association of Realtors. And while income has gone down, second home prices rose 12.7% in 2009, NAR notes. While these factors have closed the market for some, the simultaneous increased demand for rentals of vacation and weekend properties has made these purchases more feasible for others. If you are a prospective buyer, you need to consider three key issues:
1. Can the property generate enough rental income to cover carrying costs (mortgage plus maintenance, insurance, utilities, and property taxes)?
2. Will the rates you charge, especially for the most expensive properties, attract a pool of renters that is both sufficiently large and sustainable (particularly during economic downturns)?
3. If you intend to use the second home more than you will rent it, do you have the means to carry two mortgages and to pay associated costs?
Some boomers who bought second homes at their peak price, now find themselves alarmingly underwater on their mortgages, which means they owe more than the property is worth. For these owners, Karpinski recommends renting to cover expenses and waiting out the market to give the properties a chance to appreciate.
New buyers, however, “can purchase a vacation home and have it break even from rental revenue because the prices of properties are lower,” says Karpinski. “If in 2005, you bought for $500,000 and the rental market was $1,500 a week, you’d be hard-pressed to break even.” But with a property today at $300,000, “you can indeed break even. The rental rates have not gone down.”
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