According to the March 2006 report by the National Association of Realtors® (NAR), there was a record of 3.34 million second home sales in 2005, up 16.0 percent from 2.88 million in 2004. Astounding as it may seem, investment property and vacation homes account for more than forty percent of residential transactions.

According to Jack McCabe of McCabe Research and Consulting, “An estimated 40-60% of the more than 60,000 condos and homes schedule for completion by 2007 in Southeast Florida are under contract with speculators.” Speculators are defined as investors who only purchase properties in areas where they think there will be a huge appreciation factors. They never intend on occupying the property, they just sit on it during the construction phase and then get out at high appreciation times of build out. Historically, an area where large percentage of speculators invest, make those areas more vulnerable to artificially inflated prices.

The last thing you want to do is buy in an area where there are too many speculators. The risks of getting soaked after a bubble bursts is much higher.

All of this talk about a real estate bubble shouldn't stop you from buying that dream vacation home. But it should make you do a lot more research. Gone are the days of going on vacation and coming home with a second home. You need to do much more homework so that you can protect yourself and ensure you're making a sound investment

The following are tips for buyers interested in purchasing vacation homes.

• Start with a plan. Whether your buying for personal use or for investment, you should start with a business plan, just as you would if you were starting into any new business. To be confident in a sound investment takes a lot of research.
   
• Buy with your wallet not your heart. Make sure you're buying a smart investment. It's especially difficult for vacation home buyers because we tend to use our emotions more than our heads. It's easy to get caught up and sign on the dotted line when you see that gorgeous beach home or perfect ski resort, why do you think so many people own timeshares? Because they get caught in the moment and only see the romantic side of ownership without doing the due diligence necessary.
   
• Research the area. Is this a new emerging area? Or is it an older, more developed area? If you are looking to purchase in an area that's well developed, such as Cape Cod, then there's less to worry about. The supply is so low in these areas that historically they indeed hold their value. But an emerging market such as Southeast Florida, you should exercise caution to be sure that there are not too many new developments so that the inventory exceeds demand.
   
• Use your real estate agent. Pick your agent's brain. Ask tons of questions, scour through their web site and absorb as much information as possible. After all, your agent is getting paid to be knowledgeable in this area. Use his/her expertise to your advantage.
   
• Look for large creditable developers. Developers do more research than any single buyer could ever dream of doing or affording. They sink thousands of dollars into researching the market, tourism, growth, and inventory. Likely if you follow large developers your chances of failing are significantly less.
   
• Beware of overextending with “teaser” mortgages. Yes you can afford that property with a 3.5% interest only payment, but be realistic. That payment is likely to go up, and maybe faster than you think. Mortgage rates today are considerably low, but if you're using an adjustable rate or interest only just for the affordability factor, watch out, your rates will likely go up. You might be saying, I'll just sell when the rates rise, but so might thousands of others. You might be stuck with a property you cannot afford. And if you're thinking about just refinancing at the end of the "teaser" term, there is no way of telling where the mortgage rates will be when your teaser rate caps out.
   
• Leave your options open. You may be saying, “I want to buy a vacation home for personal use. I never intend on renting it out.” Well that is perfectly fine-- but never say never. Today, it may be financially feasible to NOT rent your home, but what will tomorrow bring? What will change in your finances over the years? Will you be retiring? Will your children be attending college? Will the tax rate for the property skyrocket? What about the simple costs of ownership? Buy in an area where you know you can utilize the option to rent your property.
   
• Stay away from areas with short-term rental bans. The best way to protect yourself from market fluctuation is to leave your options to rent your property on a nightly or weekly basis when you are not using it. Some complexes, local, city and counties have areas where there are covenants or laws against renting on a short-term basis. If you stay away from purchasing in these areas, then you're leaving your options open to turn your vacation home into an income-producing asset.

All in all, vacation homes are still good long-term investments. If you make well-researched and educated decisions you'll be setting yourself up for success rather than failure. Smart investing is all about eliminating your risks from the start.

© Christine Karpinski 2006

One-on-One with Richland Chambers Lake, TX Vacation Rental Owner, Michelle Helterbran (Transcript)    Christine interviews lakehouse owner, Michelle Helterbran, who had the first vacation rental on Richland Chambers Lake, TX.

Mortgaging and Refinancing Vacation Homes: Part 1 (Transcript)    Christine talks with the President of Colonial National Mortgage and vacation home owner, David Motley, about mortgaging and refinancing options for vacation homes.

Buying an Investment Property on the California Gold Coast (Transcript)    Christine talks with real estate agent, Meredith McKenzie, about the vacation rental market along the California Gold Coast.

One-on-One with Washington State Vacation Rental Owner Bob Kelly (Transcript)    Christine talks with vacation rental owner, Bob Kelly, about why he chose renting by owner in Pacific Beach, WA.

One-on-One with Canmore, AB Vacation Rental Owner Richard Colwell Part 2 (Transcript)    Christine continues her discussion on the challenges of renting and maintaining a vacation property from abroad.

Financing Options for Vacation Rental Homes    How will you use your vacation home—as a second home or as an investment property?

Buying Another Vacation Rental Home    It's contagious! Your property is renting so well you that you want to buy another. Here are a few tips to consider.

Common Mistakes Vacation Rental Owners Make When Buying a Second Vacation Rental    Three common mistakes.

Using Self-Directed IRAs to Buy Vacation Properties    Did you know that you can buy real estate, including vacation properties, with your IRA?

Ten Ways to Sell Your Vacation Home Faster    Tips for selling your vacation rental home in the cooling housing market.

Christine on the Benefits of Real Estate Investing    Real estate very rarely loses in the long term.

Second Homes vs. Investment Properties    How to tell if you're buying a "second home" or an "investment property."

Christine's Blog: Switching to Fluorescent Light Bulbs (4/23/07)    Christine talks about making the switch from incandescent to compact fluorescent light bulbs.

Buying a Hot Tub For Your Vacation Rental Property    Installing a hot tub is a big draw for potential guests.

Decorating Your Beach Vacation Rental Home    Classic and understated beach-inspired decorating ideas.