How to Bubble-Proof Your Second Home

With all the talk about our being in the midst of a real estate bubble, the decision of whether or not to buy a second home has become more difficult than ever.

But Christine Karpinski, author of two books on vacation home investing, How to Rent Vacation Properties by Owner and Profit from Your Vacation Home Dream, believes vacation homes are still a good investment. She says, “If you make well-researched, educated decisions, you’ll be setting yourself up for success, not failure.”

Karpinski suggests second-home buyers should:

Start with a plan

Whether you’re buying for personal use or for investment, you should start with a business plan just as you would if you were starting any new business. To be confident of 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 easy to get caught up and sign on the dotted line when you see that gorgeous beach home or perfect ski resort. But Karpinski cautions against getting caught up in the moment and not doing the necessary due diligence.

Research the area

Is it a new, emerging area? Or is it an older, more developed area? This makes a lot of difference, says Karpinski. If you are looking to purchase in an area that’s well developed, there’s less to worry about. But in an emerging market you should exercise caution to be sure that there are not so many new developments that the inventory exceeds demand.

Leave your options open

You may want to buy a vacation home with no intention of ever renting it out. But while today it may be financially feasible to not rent your home, you’re never sure what the future will bring. Your finances may change. The tax rate for the property could skyrocket. Buying in an area where you know you can utilize the option to rent your property is a great way to leave your options open.

Use your real estate agent

Pick your agent’s brain. Ask tons of questions. Scour through his or her Web site and absorb as much information as possible. After all, your agent is getting paid to be knowledgeable in this area. Use his or her expertise to your advantage.

Look for large, reputable developers

Developers do more research than any single buyer could ever dream of doing. They invest thousands of dollars into researching the market, tourism, growth and inventory. So 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 percent interest-only payment, but be realistic. That payment is likely to go up, and maybe faster than you think. Mortgage rates are still at all-time lows, but if you’re using an adjustable-rate or interest-only mortgage only for the affordability factor, watch out. Rates could rise and you could end up stuck with a property you cannot afford.

Stay away from areas with short-term rental bans

The best way to protect yourself from market fluctuation is to have the option of renting your property on a nightly or weekly basis when you are not using it. Some complexes or counties have areas where there are covenants or laws against renting on a short-term basis. If you stay away from purchasing in those areas, you’re more likely to be able to turn your vacation home into an income-producing asset.

For more tips from Christine Karpinski on how to own and rent vacation property, visit www.howtorentbyowner.com.