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Where should all you condo flippers and day traders put your investment dollars, now that the stock market has become a bit bumpy and residential investment real estate values have slumped an average of 29% nationwide? Drop back and punt? Not bloody likely! What about an investment that generates healthy returns, when researched correctly, and can provide a great time for you and your family to boot?

If you guessed vacation homes, you’re right on the money. Second homes in the U.S. have never been more popular. In fact, according to a NAR survey in 2005, they now represent an amazing 35% of all home purchases. Some are purchased purely for fun and peace of mind, while others do double duty as a weekend destination and a family investment. Nothing like an investment you can spend the weekend in with some friends. Just try to ski from a mutual fund. As with any other investment, you'd better do your homework first, or you could end up deep in the hole.

If you’d like to get a second home for vacation purposes that’ll work as an investment too, how should you go about it? After all, the country is replete with locations that have, as noted, experienced some pretty severe real estate depreciation. If you’re looking for an investment however, there are plenty of areas in this country where that hasn’t happened, and most likely won’t, even with the sub-prime mortgage mess we seem to be sinking deeper into by the day. Some of these are well under the radar of most investors, but may not remain so forever.

How to find these hidden real estate gems? If you’re looking for affordable recreation in addition to a good investment, you’ll want to look at the amenities offered by the region in question. Is it close to ski areas, boating, golf, fishing, hunting, beaches, horseback riding, or other outdoor recreation opportunities? Another amenity that’ll help is great weather. Finding property with a view will cost you more now, but any appreciation will be commensurately higher as well, not to mention the enjoyment you’ll derive from it while you own the property.

How about existing resort towns? Often, communities that are in close proximity to established resorts are far more affordable, yet are an easy drive when you want to do some recreating of your own. In addition, they are often the next areas to show a nice gain in home prices, as locals and not-so-rich vacationers get priced out of the main resort market. If you can stand a short drive to the primary draws of the main resort, you’ll often receive great value, and nice future appreciation in return.

Another fantastic place to discover hidden real estate gems is to look at small communities within an hour or two of major metro areas, especially those metro locations with expanding economies. Examples would be Phoenix AZ, Seattle / Tacoma WA, and Portland OR. Most people looking for second homes tend to look for something they can easily get to for weekend getaways. A few hours travel by car or train is about the limit for this type of use. Some of these locations sit for years with relatively little gains in value, then get tapped for growth by developers or discovered by vacationers. If your main concern is recreation it really doesn’t matter if growth ever happens, in fact you may prefer if it never does. If you’re looking for some appreciation along with your recreation however, you’ll need to swallow some growth along with your recreation.

For real bargains, you’ll have to really do some research. Look to planned developments or those in the permit stage. This is a bit more risky, as some planned projects never come to fruition, but if they do, they can generate some spectacular returns, in addition to fantastic recreational opportunities for you. Many popular vacation destinations were once almost abandoned mining, logging or fishing towns. Find the one where big money investment dollars are about to be flowing, and make sure yours are going there too. A little publicity in national publications never hurts either. Many areas have experienced nice gains in real estate value following a few positive articles extolling their virtues.

Some examples of once stagnant or declining areas include Kellogg ID, and Sandpoint ID. Both are now home to nice ski areas. Kellogg was also home to a huge silver mine until 1981, when it was closed down. The mine closure and the loss of the region’s primary employment source caused property values to plummet. Soon, development plans for a new ski resort, technically a modernization and expansion of the existing Silverhorn area (18,000 skier visits in 1983) are announced. In the late 1980’s a gondola is planned from the town to the ski area. In 1990 the improved resort is renamed Silver Mountain, the gondola is finished and skiers begin to come from around the region.

Needless to say, if you’d bought a vacation home in Kellogg in the late 1980’s or early 1990’s, you’d have dome rather well. A new condo project at the base area that was begun in 2004 has had a phase opened in each of the last 3 years withy around 100 units in each. The last two phases have sold out in 1 day, to give you an idea of the demand that now exists in the area.

Sandpoint had a decent sized and well regarded regional ski area, Schweitzer Basin, that had served the region since 1963. It had an existing base area with a few small condo developments and single family homes. At the end of 1998, the resort was purchased by real estate development firm and resort operator Harbor Properties. Harbor immediately poured in capital to expand the base lodge, covert some existing lodging into condos, and improve on-mountain facilities. A year later they announced a 10-year improvement plan for the ski area. The new capital invested in the ski area and the region’s other recreational opportunities, including large Lake Pend Oreille, has caused Sandpoint’s real estate values to trend nicely upward. This is coupled with it’s relative proximity to an interstate highway and Spokane, WA with it’s population base and full service airport.

How should you make sure your prospective property has the maximum investment potential? There are a few things to look for. The first is in the area itself. Does it have the amenities and investment necessary to ensure long term popularity? What about other industries and projected regional employment growth? These are important keys to ensuring long term appreciation of your property.

If you can find a second home in an area with other industries besides recreation to support it, you’ll have the principle of diversification working to protect your investment. Areas that are experiencing an expansion of industry or new industries moving to the area are even more desirable from an investment perspective. Have the local governments invested in infrastructure and favorable tax and development policies in order to attract new businesses? So much the better. The only caveat here is that too much growth, with too little structure, at some point can destroy that “back to nature” atmosphere you purchased your home for.

Get an extra bedroom if you plan on subsidizing your expenses with some rental income. Vacation homes with more bedrooms will rent for more, and usually be easier to rent due to increased demand. If you do plan on renting out your home, check with you accountant and/or tax advisor for the tax implications of the extra income and deductions you’ll be eligible for. Another bonus of the extra bedroom is that it will help the home sell for proportionately more when you decide to divest yourself of the place, as will the additional rental income.

Look for a home that has relatively low maintenance. Every dime you spend on upkeep is one less dollar you have to spend for other investments, you kid’s college fund, or that fine dining experience to maintain your sanity. If you’re part of a condo complex, you’ll have dues and assessments to contend with as well. Old appliances and construction, can lead to notoriously high heating bills in the winter, so be aware of such things.

Now obviously a vacation, or second home isn’t always a great investment, and isn’t the best investment choice for everyone (when you find that, be sure and let me know), but it definitely beats most other choices for sheer investment enjoyment. The keys to success, as with most investments, are research and timing. The difference is the amount of enjoyment that can be had in the interim.

Some more information on vacation home investing can be found in the following places:

http://www.forbes.com/2007/08/08/places-vacation-property-forbeslife-cx_mw_0809realestate.html

 
http://www.realestatejournal.com/secondhomes/