Top U.S. Destinations To Invest in a Second Home

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Top U.S. Destinations
To Invest in a Second Home

By Jane Hodges

Question: My husband and I live in Seattle and own property in Maui, Hawaii, which we are renting out until we retire. We're interested in buying another home for vacationing. Where are some of the top U.S. destinations based on investment value? Since we have one tropical home, we're thinking of a ski place.

-- Christine Cameron, Seattle

Christine: As an investor looking at vacation properties, you have plenty of company. According to the National Association of Realtors, second homes accounted for more than one-third of purchases in the residential real-estate market in 2004.

As for hot second-home investment markets, Escape Homes, a company that markets second homes online, published a list of emerging locations for second-home buyers, based on home-price appreciation and consumer demand. The list includes a mix of locales, including warm spots (Venice, Fla., for instance), and a community near you -- Vashon Island, Wash. But you may want to examine some of its other finds: Minden, Nev., is only 20 miles to Lake Tahoe, and Paonia, Colo., offers both downhill and cross-country skiing. Talent, Ore., also on the list, is close enough to Oregon's Mount Ashland Ski Area for day trips. Livingston, Mont., is a half-hour drive from ski resorts in the Bozeman, Mont., area, including Red Lodge Mountain Resort and Bridger Bowl, and is also close to the Showdown ski area. Beyond those communities, Escape Homes recommends the non-skiing communities of Big Lake, Alaska (the Iditarod Trail Sled Dog Race passes through and there is some cross-country skiing, but the area is mostly known for lake-related activities); Kingsport, Tenn.; Brunswick, Maine; and Lakeport, Calif.; which is more known for its water-skiing than cross-country skiing.

Key to making money from home-price appreciation in a ski area, says Ford Frick, a managing director at BBC Research & Consulting, a Denver-based market-research firm, is to investigate how restrictive that community is toward new development. This, he says, will require some asking around.

"Areas with the greatest scarcity of product and land and with the most stringent development laws have historically gone up," he says. Such locations include places like Aspen and Telluride, Colo., and Jackson Hole, Wyo., he says.

Mr. Frick's comments echo research by William Wheaton and John Corey, academics at the Massachusetts Institute of Technology Center for Real Estate, who wrote a paper in 2000 on why investors should not invest in ski property. They argue that an ever increasing supply of ski real estate and resorts will limit investors' potential for appreciation and cash flow over time. That's why buyers should pay attention to what new inventory is likely to appear -- or not appear -- in a given market, Mr. Frick says.

Away.com publishes a list of top North American ski resorts, but it's oriented toward skiers -- not investors. Still, if skiers flock to the list's choices of best resorts, homes you buy at or near them could attract renters. Jackson Hole, and Killington, Vt., top its list.

An important consideration is whether you desire investment value in terms of cash flow from rentals, appreciation over time, or a combination of both. Before you buy, determine what you want in terms of cash flow, real-estate appreciation and personal use of the property, and shop for second homes that fit those parameters. If you want to earn profits from rent, find out what the cash flow from rent has been for any property you consider.

If you're eyeing a home primarily for appreciation, remember the investor's caveat: Past performance does not guarantee future results. Today's hot vacation locales may not stay that way, although, generally speaking, property in the U.S. has shown at least modest appreciation over time. Areas go through their own cycles. In Park City, Utah, for instance, a wave of construction and speculative buying took place during the five years prior to the 2002 Olympics, which used Park City's slopes, says Derek Whetten, a sales agent at Allpro Realty Group in Park City. Then the market flattened for a good year before resuming modest appreciation. "It wasn't until 2003 that the excitement returned," he says.

If you plan on profiting mostly from rent, a property's price appreciation may matter less. However, you'll have to carefully research market rents, utility costs and management company fees to calculate how much renting you'll need to do to cover the expense of owning the property. 

-- Ms. Hodges is a free-lance writer in Seattle. She answers questions about managing second homes in Owner's Manual. Please send your questions to RealEstateJournal@wsj.com.

Email your comments to rjeditor@dowjones.com.

-- November 21, 2005