Second homes represented 35 percent of all existing single-family, condo, and new-home sales in 2004; a record 2.82 million second homes were sold, according to a recent report by the National Association of Realtors. For the records, this is up 16.3 percent from 2.42 million in 2003.

Second home buyers fall into two categories, some want a vacation home that they might one day use; others want a property that is strictly for investment. According to the NAR report, vacation-home buyers have a median age of 55 and a median annual household income of $71,000. Most want a home within 200 miles of their primary residence. The median price of a vacation home was $190,000.  Investment buyers are 47 years old with a median annual household income of $85,700. Investors buy closer to home - a median distance of 18 miles away, and spend a median of $148,000 for investment homes.

Whether buying for personal use or for investment the experts reiterate several basic rules for making second home purchases.

• Start with a plan.

You must know and feel secure in your investment. Think before you buy – especially you vacation homebuyers who have a tendency to buy with your heart and not your head.

“Buy Smart,” advises James Boykin, retired educator and author of ‘Investing in a Vacation Home for Pleasure and Profit.’  “Select a prime location. Look for a property that’s readily accessible by car and no more than a half day’s drive, or a short plane flight, from a large population center,” advises Boykin. “Resort-like amenities — whether golf, tennis, water access, or reliable snow for skiing — also help ensure a property’s appeal to a wider audience. Easy walking distance to these amenities (three to seven minutes) adds value. Your best bet as an investor is to buy where people want to be. In a less desirable market, there’s no one to bail you out.”

• Research the area.

Look for areas with widening freeways, a new Walmart, or that’s been promoted in the media as a place to be. Evaluate migration trends; learn the current and probable supplies of new housing. Have graphs of and projected price appreciation. For more information consult the book, ‘Are You Missing the Real Estate Boom?’  by NAR Chief Economist David Lereah. 

Is this a new emerging area? Or is it an older, more developed area? This makes a lot of difference. If it’s a well-developed area with a reputation, such as Newport, Nantucket or La Jolla, you have less to worry about. Supply is limited by geographic constraints, and these areas have historically held their value.  Exercise caution in emerging markets such as southwest Florida and Las Vegas. Feel positive that there are not too many new developments causing inventory to exceed demand.  

10 hottest second-home spots
FYI - EscapeHomes.com compiled this list of the most frequently visited destinations on its Web site from January through June 2005 (in descending order).
1. Naples, Fla.
2. Myrtle Beach, S.C.
3. Orlando, Fla.
4. South Padre Island, Texas
5. Park City, Utah
6. Las Vegas
7. Tampa, Fla.
8. Phoenix
9. San Diego
10. Destin, Fla.

• Be wary of buying in an area where there are too many speculators.

A speculator is an investor who only purchases properties in areas where they think there will be huge appreciation factors. The risks of real estate bubbles are much higher in these markets.

Jack McCabe of MaCabe Research and Consulting has concluded that “An  estimated 40-60 percent of the more than 60,000 condos and homes scheduled for completion by 2007 in Southwest Florida are under contract with speculators."

Speculators like to buy in during the construction phase and then sell out and completion. Areas where a large percentage of speculators invest are more vulnerable to artificially inflated prices.

• Use your real estate agent: Your real estate agent should be the expert on the area. Ask questions, as much information as possible. Use their expertise to your advantage.

• Look for large credible developers working the area.  Before investing tens of millions of dollars in a neighborhood, developers do extensive research into knowing the market, tourism, growth and inventory. Following large developers is said to lessen your chances of investing in the wrong area.

• Beware of overextending with adjustable and zero-interest mortgages. Yes, you can afford that property with a 3.7% interest-only payment for three years, but you also know that payment will soon rise. If you’re thinking you’ll sell when the rates rise, well then you’re of the same mindset as so many other owners. Don’t get stuck with a property you can’t afford.

Liza Mendez, of Pedro Realty, sells property sells South Florida to Central American and South American clientele. She notes high property taxes and rising prices in the state are discouraging some buyers. "Some of them are finding the prices so high that the returns are just no there," she observes. Other clients are wondering "whether this is the best time to sell," she said, given some softening in the market.