Second Homes vs. Second Thoughts

Several weeks a year, Paul and Tiffany Woodard luxuriate in their three-bedroom vacation home at a Hawaiian resort complete with pool, tennis courts, and nearby beaches.

Back home near Raleigh, N.C., Paul is an anesthesiologist and Tiffany is the property manager for their getaway, which they rent out to vacationers when they're not using it.

It has been a great refuge for the couple and their children over the years, but the financial burden involved almost led them to give the vacation home up a few years ago when property values started falling.

"We were going to sell it, but I told Paul I would take over as property manager [in lieu of paying a management company to list it]," says Tiffany, who formerly worked in the real estate industry.

She created a website for the home, listed it on property rental sites, and boosted its customer reviews by working hard to make certain each visitor's stay was positive or by adding a few free nights if anything went wrong.

Now the place is earning them an annual profit in the mid five-figure range - certainly not a windfall given the amount of work Tiffany spends on it, but enough to justify keeping the house for their own vacations, she says.

But here's the rub: Deals are still plentiful in many traditional vacation hotspots that got hammered in the downturn that began in 2008, but potential buyers need to be aware of all the costs and be certain about why they are taking the plunge. Is it an investment or an indulgence? And if it's supposed to be both, will the gains and the fun outweigh the opportunity costs and the hassles?

Monitoring the market

"The long-term outlook for the vacation market is strong because of the sheer demographics," says Lew Sichelman, a longtime housing industry columnist. "More [baby] boomers are getting older and moving into the time of life when they covet a second home."

In the shorter term, however, the market still looks dicey, experts say.

"There's a tremendous number of foreclosures that need to be worked through, and then another closet inventory" of homes that will come back on the market when it starts to turn up, Sichelman says.

Mid-career physicians who can afford to pay cash for a second home are sitting in the sweet spot of the market and can often command better deals on properties because sellers know financing is still difficult to get, says Paul Bishop, vice president of research for the National Association of Realtors.

"Investors in all-cash deals can pick up multiple [distressed] properties because they have the cash, and there are some great bargains in the Southwest and in South Florida," he says.

In today's market, however, don't bank on a quick turnaround if you're looking at the property as an investment, says Gibran Nicholas, chairman of CMPS Institute, an Ann Arbor, Mich., organization that certifies mortgage brokers.

"Vacation home buyers typically have a longer time horizon" than investment property buyers or primary residence buyers, Nicholas said.

Indeed, the Woodards have owned their place for more than a decade and have seen property values in Hawaii fluctuate substantially. The fact they are still using it for personal travel keeps them from panic selling when prices drop.

And remember, if you pay cash for a property, you're giving up on leverage, or the ability to pick up full price appreciation on the property even though a mortgage holder, typically a bank, has most of the skin in the game.

Property owner and promoter

Other than patience, buyers also need to factor in how hands-on they are willing to be if the vacation spot is doubling as an investment property.

"If you're complacent and count solely on an agent, it won't get rented in this market," says Tiffany. "A couple of bad customer reviews on the Internet or a noisy pet next door can ruin you."

A final tip that seems obvious - but many buyers forget - is to try before you buy, says Rob Keefe, president of Keefe & Associates, Inc., a Lake Geneva, Wis., real estate firm.

"Rent a house and spend at least a couple of weeks there to see if you really like it" before committing to a purchase, Keefe says.

Midwestern vacation markets that slowed in the downturn have begun picking up, Keefe says. In the Lake Geneva area alone, about $50 million worth of property changed hands in 2010, almost double the prior year, he says.

There are still deals to be had, however.

"It used to be that the gems were bought up in private sales and never came to market, but now average buyers are getting a good shot at very good properties," says Keefe.

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called "The Journey" that appears in Tribune newspapers across the United States. She holds a bachelor's degree and master's degree from the Medill School of Journalism at Northwestern University. She can be reached via editor@physicianspractice.com.

This article originally appeared in the May 2011 issue of Physicians Practice.