A Second Home--for Now
In the coming decades, baby boomers will only be driving prices up

Closer to age 50 than 60, today's retirement-home buyers favor a farsighted strategy: They're looking for vacation homes they can enjoy now, maybe rent out for some income--and then use for retirement several years hence. It's a particularly savvy gambit in the current market.

Video: BW's Susan
Scherreik: Buy now,
save later
True, prices are just as frothy for vacation homes as they are for primary residences in many areas of the country. But with 77 million baby boomers set to depart the workforce over the next three decades, housing in prime retirement spots promises only to get pricier.

Strong demand for vacation rentals helps make owning a second home affordable. In many areas, you can count on a stream of rental income to offset carrying costs. Recent changes in capital-gains tax laws also help. Married couples no longer have to pay capital-gains taxes on the first $500,000 of profit when they sell their primary home. That makes it easier for empty-nesters to trade down to a smaller primary residence and use the profit to help fund a second home. Last, it may be easier to afford your dream home while you're still working.

That buy-now, retire-later strategy appealed to Ron Pindel, a dentist in Greendale, Wis., and his wife, Marilyn. They bought an oceanfront condo on tony Sanibel Island, Fla., six years ago. ''We felt that if we waited, we might get priced out of the market,'' says Pindel, 60, who plans to retire in 10 years. The Pindels figure the 1,600 square-foot, two-bedroom property they bought for $312,000 would fetch $600,000 in today's hot market. Thanks to robust rental demand, they lease their place for $1,900 a week in the winter when they aren't vacationing there themselves.

CHANGING VIEW. Of course, buying a retirement home before you stop working isn't without risks. Second homes are luxuries that owners may have to dump in a severe economic downturn. Likewise, today's strong vacation rental market will take a hit if the economy slows significantly. Overbuilding is another danger. The home you love now for its ocean view could look out on a sea of condos when you retire 10 years from now.

But you can expect more rewards than drawbacks if you do your homework. For instance, stick to areas where much of the land is set aside for conservation, such as Taos, N.M., or the Florida Keys. Limited development will help support prices and preserve the area's character. If you plan to rent out your second home, ask local agents what amount properties like yours rented out for when the economy was soft, as in 1991, a recession year.

You'll also get more bang for your buck if you bypass the hottest vacation home havens such as Nantucket Island, Mass.; Pebble Beach, Calif.; and Aspen, Colo. Prices in these exclusive playgrounds have surged as much as 50% during the past year or so, bid up by Silicon Valley billionaires and other wealthy buyers. Besides, James Retz, manager of Fine Homes & Resort Properties at Prudential Real Estate in Irvine, Calif., says that buyers in their 40s and 50s who have not yet retired prefer places that offer more in the way of culture and even jobs. ''Retirement today means working as little or as much as you want,'' Retz says.

Places that appeal to the preretirement crowd are small, charming cities such as Charleston, S.C., and Savannah, Ga., as well as picturesque college towns such as Hanover, N.H. Also popular: tourist spots within easy driving distance of big cities, such as the wine country of Napa Valley northeast of San Francisco. While real estate prices in these areas also have climbed, they remain relatively more affordable than the marquee name resort areas, Retz says (table).

Ben Craine, 56, of Bloomfield Hills, Mich., is typical of the new breed of retirement-home buyer. Owner of a paper-packaging company, he built a $400,000, three-bedroom home in Scottsdale, Ariz., last year because his wife, Vicki, 55, wanted a place near her parents. ''Otherwise, I probably wouldn't have thought about a second home until I was in my 60s,'' he says. Last winter, the Craines rented out their Arizona residence for $6,500 a month for three months and spent six weeks there themselves. He kept in touch with his office by phone and computer. The arrangement worked so well that they will lengthen their stay to four months this winter. ''The beauty of this is that I don't have to think about retiring, which I never plan on fully doing,'' Craine says. Notes Retz: ''Telecommuting allows people to spend more time in their vacation homes.''

COMPLEX DECISION. Should you rent out your property? That decision can affect your financing and income taxes--even whether you opt for a condo or house. (Apartments can be easier to rent out.) Keith Gumbinger of HSH Associates, a Butler (N.J.) research firm that tracks mortgage rates, says you should be able to obtain a mortgage for 90% of the home price if you're buying for your personal use and you limit rentals to a few weeks a year. If you plan on renting for longer periods but don't depend on the rental income to qualify for the mortgage, lenders will ask for a 20% down payment. But if you need rental income to qualify, expect to cough up 25% for your down payment. Mortgage rates for second homes are similar to those for primary residences, Gumbinger says, with this exception: If you need rental income to qualify for the mortgage, you'll pay about a percentage point higher because the loan is deemed riskier.

As for your IRS bill, you owe no taxes on rental income if you let for fewer than 15 days a year. If you rent for 15 days or more, however, you must report the income. The good news is that you can deduct rental-related expenses. But IRS rules governing what you can deduct are tricky. If you personally use the place for more than 14 days, or 10% of the number of days rented, the IRS considers it a personal residence, and you can only deduct a pro-rata share of rental-related expenses based on the number of days it's been rented. If you limit your personal use to 14 days, or less than 10% of the days let, you can deduct more of those expenses.

Buying and maintaining a second residence is work, to be sure. However, the reward is a retirement exactly the way you want it. Even better, you'll never run the risk of boring family and friends by starting a conversation with: ''If only I had bought back then!''


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A Second Home--for Now

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