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Second Home As An Investment

Stock trader Dirk Mueller wipes his face as he sits in front of the German Stock Index (DAX) display at the stock exchange in Frankfurt, Germany, Wednesday, Feb. 28, 2007. Chinese stocks bounced back Wednesday after their biggest decline in a decade, but stock markets in Asia and Europe fell for a second day amid investor jitters about possible slowdowns in the Chinese and U.S. economies.
AP Photo/Bernd Kammerer
If you've ever dreamed of owning a vacation hideaway on the beach or nestled in the mountains, you're not alone. Last year, a record number of people purchased second homes.

Financial advisor Ray Martin visits The Saturday Early Show to talk more about this trend.

Homeowners have seen the value of their primary homes appreciate dramatically. Combine this equity with low interest rates and a second home is suddenly within reach.

Empty nesters who no longer need a four-bedroom house are selling their larger homes and using the money to buy a smaller primary residence and a second home.

But according to a study by the National Association of Realtors (NAR), more and more people are looking to their second home as an investment, not a vacation hideaway: About 40 percent of second-home buyers citied money as their motivation for the purchase.

Like the housing market as a whole, the value of second homes has steadily increased in recent years; and in popular resort or vacation areas, prices have gone through the roof. For instance, in the last year, home prices shot up 51 percent in Palm Springs, Calif. Homebuyers figure that no stock is going to appreciate like that.

But is a second home truly a good investment?

Martin hesitates to give a resounding yes or no answer to this question. Instead he says, "It can be."

You need to choose a home in "the right location, for the right price." You don't want to pay a lot of money for a second home in an area that's hard to reach or that is going to fall out of favor in a few years.

Assuming you buy wisely, your home will appreciate in value. And you can help pay the bills by renting it out. But keep in mind that if you wind up making money on the deal, it will be over the long term. A second home is a long-term investment.

Sometimes buyers jump into a purchase and forget about all of the extra costs of owning a vacation home.

Higher Basic Costs - Depending on the home's location, you may pay higher property taxes than you do on your primary residence. Insurance can also cost more if you're in a hurricane zone or flood plain. Finally, you may even pay a higher mortgage rate because lenders know that owning a second home is a greater financial risk.

Management and Security - If you live several hours away from your second home, you may need to hire a property manager. You'll need to pay for snow removal or lawn maintenance. You'll also need to arrange for security since you can't keep an eye on the place yourself.

Time Commitment - Think of all the time you spend making repairs around your house, paying bills and generally managing your property. You have to do all of this for a second home as well.

Increased Risk - A second home is often at great risk for theft and damage. If you decide to rent your vacation home, you run the risk of renters breaking items or hurting themselves, and holding you responsible.

For homebuyers prepared to shoulder these responsibilities but unsure where to invest their money, the Web site Neighborhood Scout has released its annual survey of the top 30 towns in which to buy a vacation home. Demographic specialists used information from the Census, FBI, Department of Education and other sources to uncover the top towns in costal and mountain regions.

"Their selection vetted locations according to six criteria: affordability, peace and quiet, safety, educated neighbors, homeownership mix and strong public schools," Martin explains. "The last criteria - while not intuitive - is important as it indicates the level of local community investment which also helps to maintain local property values."

Here is a look at some of the survey winners - top five in each category:

Atlantic and Gulf Coasts
Bristol, Maine
Narragansett, R.I.
Clinton, Conn.
Somers Point, N.J.
Leonardtown, Md.

Pacific Coast
Juneau, Alaska.
Oak Harbor, Wash.
Gold Beach, Ore.
Ferndale, Calif.
Gualala, Calif.

Rocky Mountains
Phillipsburg, Mont.
McLeod, Mont.
Craigmont, Idaho.
Wallace, Idaho.
Ten Sleep, Wyo.

If you're thinking to yourself that you haven't heard of many of these places, that's the point. Traditional spots like Naples or Palm Springs are no longer affordable for many. The above locations are often found right outside of more popular resort towns or vacation destinations.

Renting out a second home is a good idea, Martin says, "Think of a second home as similar to an investment in a dividend-paying stock. As an investor, you would never think of declining the dividend income owed to you on the stock, but that is just what owners of second homes do when they forgo the potential to rent their vacation home when they are not using it."

If you rent the home for less than 14 days, you don't have to pay taxes on the rental income.

So if you do decide to buy a second home, Martin explains the best way to finance the purchase. He says, "The financial strategies include tapping a home equity line of credit or a cash-out refinance of the mortgage on the primary home, which involves taking out a larger mortgage, using the borrowed funds to pay-off the smaller existing mortgage and the excess cash for the down payment or purchase of the second home."