How to Find a Second Home Bargain

For boomers with disposable income, now may well be a good time to buy.

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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.

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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 (homes sold for less than what's owed on them).

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 (2009). "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 percent, 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.

Island life. Marleen and Scott Karns, who live near Harrisburg, Pa., cashed in stock last December to buy a condo with relatives on St. Croix, in the U.S. Virgin Islands, for $310,000. This was well below the original asking price of $390,000. "It's our 'CD' in St. Croix" is how Marleen puts it.

After incurring some significant start-up costs, including interior decorating and the purchase of a flat screen TV, the Karnses now rent out the property when they are not using it themselves as a vacation home. "We feel like we've kind of landed in our dream come true," Marleen says.

What is unclear is how many couples have the ability to capitalize on the market as the Karnses have. 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 percent in 2009, the 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?

These three criteria did not deter Catherine Mettey, 50, a state transportation engineer. Mettey paid $200,000 in August 2008 for a 1928 waterfront cottage, listed for $300,000, near the Maine coastal town of Lubec. She put down 20 percent, financed the rest, and rents the cottage for $800 or more a week. "Everybody wants to rent in July and August," she says. In 2009, she received $11,600 in rental income, which covered about half of her annual costs for maintenance, insurance, mortgage payments, and property taxes.