Where To Buy?
Evaluating Second Home Possibilities
Whether you are personally enjoying the use of the property or are looking to derive income from its ownership, where you buy will go far in determining how well you can realize your goals.
The importance of the factors determining the choice of location will differ depending on your plans for the property. For example, when considering a Temporary Property (as discussed in Report #101 “A New Ownership Strategy for Second Homes”) it’s usually better to emphasize locations close to your primary residence. You are more familiar with the qualities of the area, and you can easily look in on your property even if you use a professional to manage it for you. This may not be as important a factor when choosing a Bubble Home or your Final Destination. For vacation homes, the convenience of the property to the type of activities or environment you most enjoy will be very important, even if being in that location requires travel of several hours to reach. For retirement homes, the need for consistent social and medical services often becomes critical, as does the proximity of transportation centers that will allow family and friends to come for a visit or in an emergency.
There are two aspects to selecting a community in which to invest or vacation. The first of these can be done in the relative quiet of the home or office, and that is gathering information. Here the Internet is a marvelous tool and ally, since it can provide the facts about a given community with greater detail and far less effort than would be available or required if you were to seek out the sources yourself. The second part of selecting a community is personal inspection. While the Internet can give you a very good overview of the facts about the community, there is no substitute for the personal visit. You must take the time to actually inspect the area. For investment, this means seeing the property at different hours of the day and night. For vacation property, it means spending some time in the area.
Let’s look at the considerations that go into choosing a community in which to buy, either for investment or vacation purposes. These obviously overlap in some ways. A vacation home can be a source of investment if you want to rent it out when you not using it, or if you are looking to realize a profit when you sell it. We will differentiate between the considerations that are most important for investment property and for vacation property, but will indicate which considerations are important to both. We will also look at the information gathering and personal inspection aspects and suggest how to accomplish these efficiently and economically.
Pondering the Temporary Property
A lot of real estate investment advice, particularly the type you see on television, makes it look so easy. If it were, there would be no profit available since everyone would do it. But with careful observation and decision-making, it can be done successfully. The primary motivations for buying investment property are income and appreciation. There are three basic types of investment homes: single family detached houses, condominiums, and multifamily buildings. Multifamily buildings can either be market rate rentals, where the processes of supply and demand will determine prices, and government assisted housing, where rent levels and income eligibility levels are preset by Federal, state or local government.
Each of these types carries with it its own challenges and financial arrangements and each will appeal to different markets. As a general rule, multifamily buildings, either market rate or government assisted will have a more continuous rental history than the other types. However, these are lumpy investments requiring substantial capital and large maintenance budgets. It’s usually better for the small investor who is attracted to this property type to become part of an investment group, either private or through a publicly traded real estate investment trust (for information, go to www.nareit.com ).
Single-family rentals are generally easier to manage, both financially and physically, for the small investor. They can be acquired with a relatively low capital investment, record keeping is simple and the tax reporting requirements are as simple as those for regular income. Physical upkeep is simple (and virtually identical) for anyone who owns a principal residence, whether he does it himself or hires professionals.
The major issue with single-family rental housing is continuity of occupancy. Since most of these properties are located in predominately owner-occupied neighborhoods, the departure of one renter may not be immediately followed by the appearance of another, as renters look elsewhere. Thus, advertising costs to keep the house occupied are likely to be high. Both higher vacancy rates and higher advertising costs will affect the net income from investment in this property type. The exception to this is the investment property located in a vacation community. Here management and advertising fees are wrapped together, and if you choose an effective representative, continuous rentals (at least during “the season”) are probable.
Condominiums represent sort of a middle ground. Acquisition costs are similar to those of the single-family house, but the additional condominium fees are analogous to the higher maintenance costs of multifamily buildings. Condominiums, however, are more flexible investments that either of the other two. You can buy a condominium as either a full year home investment, or as a vacation season investment. In the latter case, it can serve as a dual-purpose property if you choose to spend several weeks a year in it as a vacation home.
You will find it most efficient to specialize in one of the major investment types, particularly if you own more than one property. The lessons you learn form your first experience will make subsequent purchases and sales more rewarding. Before you can begin assessing communities and looking for property, you need to make a basic decision as to the form of property in which you choose to invest.
As Usual, It’s All About Location
Your ability to maximize the net income you receive from investment property depends on choosing the right property in the right community. Doing so will minimize the amount of time the property is vacant and may also increase the monthly rental you can charge. But your own preferences as to location and building mean very little in this choice; the property and the community must appeal to the renters who will consider your property among all others. So, your must look at the attractiveness of the community from the viewpoint of the renter.
It may be truism, but the best locations for investment homes are communities where there are a high percentage of renters. This is true at the city or town level as well as at the neighborhood level. This means doing some research into the structure of the population in the community. The best source is the Census Bureau web site (www.census.gov), where the results of the 2000 Census are available down to the census tract level, an area of about five square blocks. You will be able to look at the percentage of residents in your target community who do rent and the age and household structure of the community.
Also important is the structure of employment in a community. Different types of industries will bring different housing configurations. Determine the number and type of jobs being created or lost; these numbers will tell you what the prospects are for investing in rental property there.
Going to the Census site may be a bit more work than you’re willing to do in the investment process, and you may not want to become a labor statistician. What can you do? There are two alternatives that will save you this expenditure of time and effort.
1. Consider your backyard first. If you have lived in a community for any period of time, you should be familiar with the qualities of the different neighborhoods in your area. You know where the students from the local college live; you know where lower income service workers rent, and you know where the upper income luxury market can be found. Staying close to home and leveraging this knowledge is a sound investment strategy. In addition, you can drive past your investment whenever you want at no cost and with little bother.
2. Work with a pro. One of the major competencies of Realtors is the knowledge of properties and communities. They spend long hours every day understanding what is occurring in the real estate market. They can point to the best available properties and provide the context (merits, liabilities, rental possibilities) for those properties. If you don’t choose to invest where you live, real estate professional are even more important. They may be the only (and certainly the most cost effective) way you can find out about the area in which you seek to acquire property.
Even if you use a professional, and even if you invest where you live, there are some very specific factors that you need to consider in choosing a location. Each of them can be resolved by answering a series of questions. The factors are presented in order of importance form the viewpoint of the renter.
Accessibility. The most attractive properties will be those that offer the best access to the things renters value. For example, renters tend to want to be close to work or school regardless of space considerations. A location that is near these centers or transportation convenient to them rates higher than one that may be larger or better appointed. Again as an example, a vacation rental property is more valuable the closer it is to the water, the wilderness or the golf course. So, in evaluating a location for investment, ask (and answer) the following questions. You can score each answer on the basis of a 1-5 scale, and then compare total scores for each alternative property.
1. Where is this property located in reference to major employment and education centers? The closer the better.
2. Is the property convenient to major transportation corridors? Consider both roads and public transportation here.
3. How convenient are shopping, amusements and recreation? Renters often use public space more than private space for non-work needs.
4. If the investment property is a vacation rental, how close is it to major recreational sites (water, mountains, golf, etc.)?
Safe and sane. In this environment, safety is a high priority for everyone. For renters, this is even truer than for owners. In part, this is because owners have more direct control over the security of their properties; in part, it’s because rental properties tend to be in more densely settled areas with higher crime rates. In either case, renters will rate alternative properties in part on the safety of the neighborhoods in which these properties are situated. So ask yourself the following questions that will rate the neighborhoods in which you seek to invest.
1. What is the crime rate in your target area as opposed to the metropolitan area as a whole? Check it out at www.robertniles.com/data.
2. What security precautions have been taken at the property? As a related consideration, think about what you are willing to spend to increase the safety of the property after you acquire it.
3. Is the property fireproofed? Fire is often a greater risk than crime in many areas.
4. If the property is a high-priced or vacation condominium, is the community gated or the entrance tended 24/7?
Neighborhood Quality. There’s an old saying that the best indicator of whether an area is on the upswing or on a downward path is the number of broken windows. When there is pride in a community, those windows will be replaced. If there is neglect, the windows remain untended. Research has shown that where the community is strong, house values are high, and demand for living in the community high, as well. Most people, renters included, want to live in vibrant, unified communities. If you are considering an investment property, the quality of the neighborhood is a very important factor. It will go far in helping you maintain strong cash flow and high appreciation on the property. The important factors are listed below.
1. How strong are the neighborhood organizations? When a community is progressive, the residents will participate.
2. What is the quality of the neighborhood schools? Even if renters tend to use schools less than owners, they will benefit from communities where education is a priority.
3. Do the commercial areas in the community attract a large volume of street traffic? Busy areas are more vibrant, exciting and attractive; besides, they tend to be safer.
4. If you are considering a single family detached house as an investment, what percentage of the population owns in that neighborhood? Traditionally, high percentages of ownership are associated with better neighborhood quality.
Choosing a Vacation Home
Unlike investment property, vacation homes are sought for a number of reasons. Sometimes, they represent a stake in an area where one has fond memories of childhood vacations. They may be seen as retreats where the pressures of the weekday work world can be put aside for short periods of time. Some people see them as “audition” homes, which may become a principal residence when retirement comes around. And in any and all of these instances, they can also be seen as partially a vacation home and partially an investment.
Because there is a diversity of motives connected with the decision to buy a vacation home, the process of choosing a community is less straightforward than it is in the case of a rental property. An investment property can be chosen in a relatively objective fashion, since for the most part, you never will live there. The purpose of owning the property is to appeal to others so that you can maximize your return from your investment. With a vacation home, emotion and subjective judgment come into play much more significantly. You will live in the house and participate in the community, so your own preferences will be the guiding factor here.
Clarifying those preferences is the first step in deciding on where to buy. If you can come to a clear understanding of why you’re making this purchase, what type of relaxation activities you prefer, and what your ultimate goal for the property is, than the choice of a community becomes a process of matching up community attributes to your own designs.
The best way to choose a community in which to purchase a vacation home is to begin with yourself and your family. You need to know what you want before you can determine where to look. Work you way through the following process:
- How much do we intend to use this home? Answering this question will determine two things. First, it will tell you how far away from your principal residence you need to look when evaluating potential vacation homes. If your intent is to use the property each weekend and several other weeks, travel time becomes a significant factor. You probably want to stay closer to home. For example, if you live in New York City, you may want to consider some of the upstate counties, the shore communities of New Jersey or the Pennsylvania mountains when looking for a weekend retreat. Each of these can be reached in two or three hours drive and are thus reasonable to consider for weekends. But if you want a place just for longer vacations, then your scope of choice widens. When you go to a place for a week or two, travel time becomes less important, and any location that meets your other criteria is possible.
- What do you do to unwind? Any choice of a vacation home must center on the vacation itself. No vacation home will be enjoyable if members of the family can do what they find enjoyable. Dad’s desire for peace and quiet fishing in a mountain lake may not suit the kids’ need for active fun. Remoteness may bring peace but won’t work if no one wants to prepare meals or if the kids need to associate with their peers. Before you make any exploration of vacation home possibilities, come to a clear understanding of what type of atmosphere, amenities and facilities the whole group wants.
- Is this a nostalgia trip? If you spent many happy hours on vacation with your family in a particular spot, you may wish to return there and buy a home in the same location. This is a legitimate wish but you should consider how important this is to you. Sometimes, you can’t go home again. Prices have risen, congestion increased and many of the things you fondly remember have disappeared. More importantly, those around you do not necessarily share your memories. If the vacation home is to provide satisfaction, it must meet the needs of the whole household. Even a seemingly familiar place requires investigation before you seek to relive old memories. Don’t let nostalgia for the past come before the more important considerations of the present, where you live.
- How long will you own this home? Plan ahead. If you want to hold this vacation home for the long term, think about how the preferences and needs of family members will change over time. Kids grow up and the desire for play space evolves into the need to be with their peers. The young and vigorous you will age and slow down. Things, which you could do, you no longer can. Any successful vacation home choice will reflect a desired holding period. One that stays in the family for generations is of necessity flexible both in terms of its physical capacity and its access to recreational activities. A vacation home that will be sold in a few years must satisfy the investment criteria we defined above.
Is it just pleasure or business as well?
Some folks need to rent their home out for at least part of the year in order to afford it. If so, the decision on a location is determined in part by the attractiveness of that location for seasonal renters. Not all vacation homes will be suitable as investments. Those located in beach communities (in fact near any water recreation) are far more desirable both as rentals and for their eventual resale value. The tax laws also come into play here as there are limits to the amount of time an owner can use an investment property before the tax treatment loses many of its benefits. These are explored in Report # 102 “Second Residence . . . or Rental Property”?
How do you find and evaluate a vacation community? We’ll make the assumption that you do not currently live in a vacation community. After all, if you did, why would you want to go somewhere else? So, the problem you face is finding potential vacation communities and evaluating them. You’ve already done the first step in this process, because you’ve used your self-analysis to narrow down the range of choices, both geographically and functionally. You know how far you want to travel, what type of community you want, how long you will own the home (ideally), and whether you want to rent it when you’re not using it.
The next step is to look at some specific communities and some specific properties. There are three important considerations in this process.
1. Go where you’ve been. Think about places you’ve visited, either on vacation or for other reasons, and that you think fit your vacation needs. This gives you a leg up since you have a working knowledge of the area, have some information to use in compiling its merits and demerits, and can get a good fix on costs (including travel time and expense) in having a vacation home there.
2. Visit again. This time, look at the whole community through the eyes of someone who will be part of it and not just a short-term visitor. It’s important to visit during all the times you intend to be there. The lively, summer, beachfront community may turn into a boring, deserted, dead autumn town. On the other hand, the winter ski community may turn into a summer playground of mountain trails, green forests, good fishing streams and pleasant golf. The seasonal mood should match your needs, and you should visit often enough to be able to gauge those moods accurately.
3. Use a professional. In all likelihood, you will be buying a vacation home at some distance from your principal residence. This makes it even more important to use the services of a real estate professional who will make it much easier to find the best community to suit your needs. There are two good ways to identify a real estate agent to use. First, ask one in your own community that you trust to refer you to a colleague in the areas you wish to investigate. This avoids the shot in the dark approach of simply looking up a real estate professional in the phone book. Alternatively, if you don’t have a real estate professional that you can ask, use the Internet. If you search on the areas of interest, you will find a number of real estate web sites. You can then e-mail a series of questions that will constitute an interview to screen potential agents:
o How long have you been in business?
o How long have you been doing business in this market? Obviously experience is a big plus.
o Have you had experience with buyers looking at vacation homes from a distance? Specific familiarity with your type of need is important.
o Can you give the names of some of your past customers that I can call? The agent should be more than willing to share this information with you.
o Will you work with me as a buyer’s representative? It’s important that you have the full attention of your agent.
o What information will you require from me? You might also want to ask how often your physical presence will be required.
o What services do you offer? You will be dealing at a distance, so an agent who offers all the services needed in the transaction would be more useful to you.
o What is your usual pricing for an engagement like this? Price is always the tiebreaker, but should never be the prime consideration in a transaction of this magnitude.
You can, of course, add to this list, but this represents the basics of what you need to know before proceeding. Going through this process with a number of agents (three to five is usually the most efficient number) will help you find the best fit for your individual need.
Vacation homes as retirement homes
Approximately one-fifth of all second home owners see the home as a potential retirement residence. If you are considering buying a vacation home that could turn into a retirement option, there are three considerations that you should put on your list as you assess your options.
1. What is the quality of medical and social services in the area? As you age, you will come to rely more and more on the helping professions and your own mobility will diminish. Being close to good community hospitals, elder centers, and recreational opportunities suitable to age becomes more important as time goes by.
2. Will the home age with you? Steps become a barrier as you get older, regular door openings are too narrow and regular counter tops too high for wheel chairs, and regular wall studs are often too weak to hold grab bars. Before you decide on a house, inspect its construction carefully not just for now, but also for 20 or 30 years from now. We live longer these days and you’re likely to spend more time in that house than you think you will.
3. Can your friends and relatives or medical professionals reach you easily? The visits may be friendly and enjoyable, or they may be necessitated by a crisis, but they will come. Whether you want them to, as a break form the routine of the retirement community, or whether they have to, your friends and relatives will come more frequently if you live near a major airport or train station or bus station. When you select the home, evaluate it for convenience of access.
Vacation homes as investments
The factors that determine your choice of an investment property and those that determine your choice may come into conflict when you want to use your vacation to generate revenue while you are not using it. This alters the process by which you may choose the home. Now you must balance your own needs with the preferences of potential renters, since what you want in a vacation home may not necessarily be attractive to others. There are four additional considerations that you want to include in your planning if your vacation home will also be a rental but that you wouldn’t think about if the home will be exclusively yours. These are necessary to ensure that your vacation home is also a sound investment. (Rental tips can be found in Report # 110 - “Making Cash Flow from Your Second Home”).
1. Buy near the water. In a recent study done by the National Association of Realtors, the top five recreational desires of vacation home owners all had to do with water. Vacationers most love to swim, boat or fish, so choosing a place near water will most likely suit both you and your potential renters.
2. Buy within easy reach of a major population center. While you may love the remoteness of some mountain lake, if it takes a long time to reach your hideaway, not many renters will share your view. In order for a vacation home to make sense as an investment, it must be readily accessible to major population centers, as Palm Springs to Los Angeles, Lake Tahoe to the San Francisco Bay Area or Ocean City is to Washington and Baltimore. This proximity may not completely suit you, but remember, you’re balancing two goals here: vacation and profit.
3. Choose durability. If you rent your vacation home, you lose control over the treatment of the house and its furnishings. Choose the house for ease of operation and durability. Similarly, choose the furnishings in a way that minimizes their chance of breakage. Even the best of renters will never treat a rented space with the same care and respect that the owners would.
Choosing an investment or vacation property is both easier than it has ever been and more difficult. The difficulty arises because of the increased demand for these properties. There are a variety of reasons, chief among which is the demographic surge we have termed the baby boom and which is now moving through a period of life when additional real estate makes sense for both portfolio reasons and for family reasons. At the same time, the supply of investment and vacation properties has failed to keep up with demand because of a dramatic rise in home ownership and restrictions on land use that have hampered the creation of new housing. So the market remains very tight.
But buying an investment or vacation property is also much easier than it has ever been because of the abundance of information available to the prospective buyer. The Internet is a marvelous tool for research the housing market, but also for finding out about a community. Local newspapers now have detailed sites that allow you to find out about community organizations, leisure time activities and safety factors. From the comfort of your own home, you can find out how it is to live somewhere else. You can also identify and evaluate potential investments, and eliminate properties and even whole areas before you physically begin to search for a property. There is no substitute for actually visiting communities that interest you. That’s the only way to gauge accurately the suitability of a house or a community for your purposes. Before you go, though, visit all the relevant web sites. It will give you a leg up on your decision and will make you feel more comfortable with an area when you actually go there.
Copyright Inman News. Used with permission.