More people are turning to second homes as investments — among other reasons — in this shifting economy. Baby Boomers are looking for their weekend getaways. And, business people are foregoing a stale hotel room to own something a little more familiar in their most traveled city. So, are you in on all this action?
By Michael J. Pallerino
My how times have changed. It wasn’t too long ago that our parents — affably known as the Greatest Generation — preached the virtues of being debt free. That meant owning the roof over their heads was as monumental as finding the Holy Grail. Is it any wonder then that this bouncing Baby Boomer generation of ours never met a loan it didn’t like?
Enter the second home market. In an economic climate that seems to shift from good, bad to worse with the wind, Americans continue to snap up second homes, either as investments or vacation properties. In fact, second homes accounted for four of every 10 sales of existing homes, according to a 2006 report by the National Association of Realtors (NAR).
There is no question that second home ownership is an important part of today’s investment strategy. Throughout the NAR report, second-homeowners are referred to as people who own one or more residential properties, along with their primary residences, for vacation or investment purposes.
“While there are many benefits to owning a second home, the main reasons people buy a second home today are for retirement or for investment,” says Jon Millikin, sales director for Ocean Reserve Condominiums, a sales associate for Koenig & Strey GMAC Lincoln Park and a broker-associate with Majestic Properties. “Despite what people are reading in the newspapers and seeing on TV, real estate is still a sound investment.”
Millikin says to look at it this way: If you want to invest in Wall Street, you write a check for $250,000. If you want to invest in real estate for $250,000, you can finance 80 percent, 90 percent or 100 percent of the purchase price, deduct a portion of your mortgage interest for tax purposes and still have something you can see and enjoy, i.e., a second home.
Along with being an investment, second homes present great opportunities. According to the NAR report, nearly 28 percent of homes bought were for investment purposes, and an additional 12 percent were vacation homes. Most of the buyers were Baby Boomers in their top earning years, looking toward retirement and hoping to build wealth or find a second home that gives them everything the first one doesn’t.
“For some, it may be hunting and spending time in the woods,” says Jack Kosin, director of sales and marketing for Cranes Pond, a development in Michigan. “For others, it may be water skiing all day until [they] can’t move, or biking on the beautiful country roads and mountain biking trails. As Chicago and the suburbs expand, so do our lake, golf and outdoor communities.
“Many are expanding because of the amount of people from Chicago seizing the opportunity to buy that place they always wanted,” he continues. “Add the Baby Boomers into the equation, and you can understand why some sleepy old towns are developing waterfront condominiums, golf courses and new shopping districts. We are banking on having a lot of our residents being second homebuyers from Chicago here at Cranes Pond.”
Targeting second home buyers
The second home trend can be traced to after 1997, when Congress changed the tax code, allowing most homeowners to duck capital gains taxes when they sold their homes. The exemption is $500,000 for married couples, and $250,000 for singles, if it was their primary residence for two of the past five years.
Under the old system, the only way to avoid the tax was to “roll” the gains into another home of equal or greater value. Then, Americans bought bigger, costlier homes. Today, they can downsize and use the equity built up in their homes to buy second homes.
“Trends in the second home market are very similar [to the ones you are seeing in Chicago and the suburbs],” Kosin says. “People are knocking down existing homes and building very large, but very beautiful homes.”
For an interesting perspective on the second-home market, take the Phoenix/Scottsdale area. The vibrancy of the Phoenix metropolitan area offers an array of culture, shopping and fine restaurants that appeal to the vast number of young professionals, corporate executives, empty nesters and jetsetters who are in the market for a second home.
“The second home market [in Phoenix] is booming, and we do not see it slowing down anytime soon,” says Sharon Rizzo, president of Rizzo Realty Group in Chicago. “One reason is because Phoenix is known for their vacation spots that afford year-round opportunities for golf, camping and other leisure and lifestyle activities. In addition, a strengthening economy and historically low interest rates have contributed to a dramatic increases in the second-home market.”
According to the U.S. Census Bureau, Arizona’s population is expected to increase by 5.6 million over the next 25 years, making it the second-fastest growing state behind Nevada. Adding to the allure is the fact that the Phoenix area topped the nationwide list of metropolitan areas in home-price appreciation during 2005, with the price of homes rising nearly 40 percent. Today, the market has returned to more normal levels with appreciation rates hovering around 16 percent, which is still above the national average.
Rizzo says that second home buyers are recognizing this potential and seizing the opportunity. She credits the growth in the Phoenix and Scottsdale markets to several factors, including affordable prices, market appreciation and an employment base that has sparked a 12 percent increase in jobs over the past three years, five-times as fast as the national average. The area was even ranked the second-safest city in America by Risk and Insurance Magazine. These factors have enticed Baby Boomers and Canadians alike, the latter of whom are looking to escape the harsh winters.
“We are seeing that many of our second home buyers are seeking to get away from the daily maintenance of owning a home and want their second home to be maintenance free while being located at the center of everything,” Rizzo says. “They aren’t looking for a big home; they want to live close to restaurants, entertainment, recreational parks and golf courses. Being able to lock up their condo and go back home for six months proves to be the most convenient solution for them.”
She muses that another part of the Phoenix lore is that the area never experiences major earthquakes or tremor activity. “If you leave your home for six months, you can be certain that it’ll be there upon your return,” she says.
Buying homes abroad
In their book, “Kiss, Bow or Shake Hands: How to Do Business in Sixty Countries,” authors Terri Morrison, Wayne A. Conaway and George A. Borden discuss how crucial it is for people to be sensitive to cultural differences. And, while the best reason for doing so may be ethical, they emphasize how important it is for business as well.
Joann Wright, a big fan of the book, says that the same philosophy that Realtors employ in the States works abroad as well: Courtesy and good communication are key.
“People are people everywhere, and if you treat them right and give them help and good information, you will be able to sell real estate anywhere,” says Wright, a real estate consultant with American Invsco Realty. “The key is to know the country you are dealing with — the cultural, financial and business climates. It is easy once you know how to talk to people and how to treat people.”
Wright’s international home sales focus on Panama, where business is good. Today, there are 115 projects under construction with a total of 300-plus permits for construction being issued by the government. “It is not big yet, but it’s getting there,” she says. “I believe Baby Boomers are more comfortable with traveling and living outside the United States, and they are the group that appears to be driving the international market. Some people purchase beach properties and only spend a month or two at the property, so in that case, they can rent the property for a high rate for the other 10 months and actually make money.”
Selling and showing homes in the international arena has its share of rewards and challenges. She says it’s a matter of doing your homework. Take showing properties. Wright suggests partnering with an agent from the area. “In my case, I have a lot of my own listings, and I can go to the development in Panama and show the properties,” she says. “The contracts, paperwork and funding must be done in the country in question.”
Why a country such as Panama? Wright says the benefits include tax benefits for retirees, investors and developers. One of the major benefits is that because the U.S. dollar has been in operation since 1914, there are no currency issues.
“Buyers range from people who are very wealthy and can afford to live anywhere they want in the world, to people who cannot afford to live and retire in the United States,” Wright says. “Mostly the people purchasing are retirees who find themselves unable to live in the U.S. because of the costs, they can live on 30 percent of what it costs in the U.S., which allows them to have a better quality of life on a limited income. There are a lot of investors, too. They buy condos and beachfront properties and rent them and hold them for a time, and when the time is right sell them for a large profit. So, internationally, there is a mixed bag of people making up the fabric of purchasers who makes the market attractive and diverse.”
As for people buying second homes in the States, Millikin says the investment factor is key. In the South Florida market, especially Miami, there are many buyers from Venezuela and Latin America.
“With the recent uncertainty and turmoil in their governments, the Latin American population has become anxious to invest some of their money in the United States,” he says. “This investment also provides them with a second home in the United States where they can come and live with their family should they decide to leave Latin America. From a real estate agent or mortgage lender standpoint, working with ‘foreign nationals’ has become a real pleasure as underwriting guidelines requires them to put 20 percent down toward the purchase of their home. A real estate agent and lender seek comfort in knowing that their client will close on the property, relatively hassle free.”
Know your area
Regardless of where you are selling real estate, agents are emphatic about one thing: know your area and the product. Millikin suggests joining the local Realtor association and the local MLS. He also recommends that agents working in other cities partner with established agents in that city. “By working with another agent in a team atmosphere, out-of-town agents can help share the marketing, office and membership costs of maintaining two real estate licenses,” he says. “Real estate agents spend a lot of time and money trying to establish their clientele business and name creditability, and having someone to help maintain that image is crucial.”
Trying to be an expert in all areas is next to impossible. Says Millikin, “At the end of the day, a real estate agent’s primary job is to meet the client’s needs; being well educated in your area of expertise allows you to fulfill that responsibility.”
Director, Sales and Marketing
Real Estate Consultant
American Invsco Realty
Sales Director, Ocean Reserve Condominiums
Sales Associate, Koenig & Strey GMAC Lincoln Park (Illinois)
Broker-Associate, Majestic Properties (Florida)
Rizzo Realty Group