There are very good reasons for the trend. A safe investment strategy and the desire to work and play in warmer climates are strong drivers behind the number of Minnesotans seeking second properties. Some buyers just want a vacation home they can enjoy during the winter. Others want a home they can rent out for additional income. Some seek a second home to ease into retirement. Most of all, however, “When people buy a second home, they’re buying a lifestyle,” says Melanie Greenstein, president of Minneapolis-based Rise Companies, a real estate brokerage focusing on second homes.

Baby boomers make up the largest segment of second-home and vacation-home buyers. More than one-half of all second-home buyers are forty to fifty-nine years old, according to the American Resort Development Association. Greenstein notes that many of the buyers she helps directly or refers to brokers in other markets are in their fifties and sixties. “Most of the time it’s for empty nesters,” she says. Recently, though, she has noticed more buyers in their thirties and forties. “They’re buying now for the future and as a real estate investment.” Greenstein attributes younger adults’ increased interest in the real estate market to the recent resurgence of purchasing property as an investment strategy.

The struggling economy and weak stock market make investment in a second home more attractive, as do today’s historically low mortgage rates. Despite the recession, average home prices among all types of homes rose more than 8 percent in 2001. According to NAR, the median price for a second home was $162,000 in 2001, up some 27 percent from NAR’s previous measurement in 1999. The average values of second homes often exceed the averages for primary residences. It’s a safe bet that many second homes also outperform the national average for price increases because these homes are often purchased in hot vacation or retirement destinations such as Scottsdale, Arizona; Naples, Florida; and Aspen, Colorado.

And don’t look for the real estate bubble to burst anytime soon, say real estate industry insiders and economic gurus such as Federal Reserve Chairman Alan Greenspan. Real estate markets tend to be stable because they are highly localized and transaction costs are high. From the investment perspective, although the rate of annual valuation increases may slow, real estate remains a safe haven.

Deciding Factors
Greenstein notes that when a client buys primarily as an investment the sales cycle is fast, compared to the lengthy decision-making required by those who are making an emotional decision on a leisure home—a process that can take several months. Myriad factors must be considered before purchasing a second home, such as its future as a retirement home, the potential to trade up, or the investment opportunities. You’ll need to research the locations you are considering, as well as the tax implications. Your price range and available financing play a key role, as does the type of ownership, such as equity or cooperative ownership.

Lifestyle and interests are important to consider, as is climate preference and proximity to airports. You can also get a better idea of what types of properties are easiest to rent or resell in the area. Renting a vacation home before buying is a great way to get a feel for the community.

Purchasing an existing home versus building your own is another consideration. Greenstein, for example, will help clients with building specifications and floor plans, as needed. “So far, half of my clients are building semi-custom homes that usually take about six to twelve months to build,” she says.

Lesson Learned
For Minnetonka resident Nancy Golden and her husband Marshall, the process of securing a vacation home was a nail-biting experience. The couple happened upon a gorgeous golf course community outside of Las Vegas and sought out the development’s sales office. “We had no intention of buying on that vacation, but drove into the country club area and loved it,” recalls Nancy.

Two weeks later, the Goldens were surprised to learn the lot they wanted had been sold and that the sales representative they’d worked with had left the development. They ended up making trips back and forth between Minnesota and Las Vegas to arrange for the purchase of another lot in the same resort. While they are now building their vacation home, they aren’t sure if the three bedroom, three-and-one-half-bath house will be their final retirement destination. “It would have been much more efficient to use a broker,” says Golden with regret.

The Goldens could have avoided extra headaches and expense if they had tapped into the objective representation of an independent real estate agent or broker. Brokers act on behalf of clients to zero in on the appropriate market and property, streamlining the process at no cost to the clients. They take a lot of the hassle out of dealing with sales representatives and other agents. They’re keyed in to market information, such as cost-of-living data and new developments, and offer quality referrals to builders or interior designers. If they don’t have the information or access to a market, they can refer customers to brokers who do. Greenstein, for example, taps into a network of fourteen brokers in popular destinations such as Florida, California, Nevada, and Arizona. “When choosing an agent, consider his or her experience, skills, and resources,” she advises. “Look for expertise in the location. You want somebody who is going to follow through and is knowledgeable.”

Second Homes Don’t Have to Be Taxing
Long before transactions are made, even for those with more than adequate financial resources, a number of nuances to financing and tax loopholes warrant careful diligence. For example, for those who plan on building a home as a second or retirement home and want to move within two or three years, taking out a home-equity loan on your primary residence can help you avoid higher-priced construction loans. Recent changes in capital-gains tax laws brought by the Taxpayer Relief Act of 1997 have made the pain of selling a home easier. When a primary home is sold, the new tax laws allow singles to bypass paying capital-gains taxes on the first $250,000 capital gain; it’s $500,000 for married couples. This makes it easier for empty nesters to trade down to a smaller main residence and use the profit to help fund a second home.

Wendell Maltby, Minneapolis regional manager of Starker Services, a national qualified intermediary for tax-deferred exchanges, says the tax laws are complicated, but worth the effort. “An Internal Revenue Code Section 1031 tax-deferred exchange...can be used on second homes with some planning,” Maltby says. He gives the example of a couple that plans to purchase a third home with an eye on retirement. They already have two other properties: a primary residence and a lake home. If they sell their primary residence, the capital-gains tax is subject to the above limits. They then move into their lake home and, regardless of how much time the couple spends there, if they show it as their primary residence for at least two years (on records such as tax returns and driver’s licenses), the couple is excluded from capital-gains tax upon selling the lake home. “They will then have the cash, tax free, to purchase their retirement home,” Maltby adds.

In another example, a Minneapolis resident owns a primary residence and a rental property. Using a tax-deferred exchange, she can take the proceeds from the sale of the rental property to buy a property in Florida where she ultimately wants to retire. “Rent out that property for at least one year,” Maltby advises. “When you get ready to move permanently, sell your primary residence, which is excluded from capital-gains tax because it’s a personal residence,” he says. Then, move the renters out of the Florida property. “Now live in the Florida home as your primary residence for two years and the capital-gains tax, deferred from the former Minnesota rental, goes away,” he says.

Overall, Maltby cautions to check with your accountant before taking action. With advice from tax counsel and good property planning, a second home or vacation home can be sold without costing its owner a fortune in taxes.

—Marcia Jedd