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Saturday, April 22, 2006 - Page updated at 12:00 AM

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Real estate: Home, sweet investment

Special to The Seattle Times

Trends in real-estate investing: second homes


Sales of these investment and vacation properties surged to an all-time high in 2005, accounting for nearly 40 percent of all home sales, according to the National Association of Realtors.

Some 12 percent were for vacation homes and almost 28 percent for investments — reflecting the trend of the past few years toward second-home purchases primarily for investment.

Buyers' top reason for second homes: Diversifying their investment portfolios.

Hold until retirement: Nearly one in five second homes will become primary residences after their owners retire (27 percent of vacation homes; 14 percent of investment property).

Boomer boom: Typical second-home buyers are baby boomers, says the association's chief economist, David Lereah, so "it's likely over the next decade that second-home sales will remain historically high."

Real-estate investment clubs are hot: These groups share info and tips, but typically don't pool money. The number of National Real Estate Investors Association-affiliated clubs more than quadrupled — from 44 to nearly 178 — between 2002 and 2005. Some say as many as 500 other start-up clubs run outside this group.

Typical investment-property buyer: 49 years old. Annual 2005 income of $81,400.

Typical vacation-home buyer: 52 years old. Annual 2005 income of $82,800.

Sources: Commercial Brokers Association (CBA); National Association of Realtors; U.S. Census Bureau.

For more


"Investing in a Vacation Home for Pleasure and Profit," by James H. Boykin (Thomson South-Western, Mason, Ohio), 2005, $19.95.

National Association of Real Estate Investment Trusts: www.nareit.com

National Real Estate Investors Association: www.nationalreia.com

Professional Real Estate Investor's Association Seattle chapter: Call 425- 458-4797 or visit www.REAPSweb.com

"Real Estate Investing for Dummies" by Eric Tyson and Robert Griswold (Wiley Publishing), 2004. $21.99.

Great places to buy a second home


EscapeHomes.com's Top 10 up-and-coming markets for second homes:

1. Big Lake, Alaska

2. Brunswick, Me.

3. Clear Lake, Calif.

4. Livingston, Mont.

5. Minden, Nev.

6. Murphy, N.C.

7. Paonia, Colo.

8. Talent, Ore.

9. Vashon Island, Wash.

10. Venice, Fla.

Source: Mid-2005 ranking (latest available) by Escape.Homes.com, an Internet service matching potential second-home buyers and agents.

These days, "bubbles" and "flipping" are more the talk of real-estate investing than of bathtubs and burgers. With stock-market uncertainties and the memory of the tech crash, lots of people are turning to real estate as an alternative.

And specifically to flipping — rapidly turning over properties — and investments in second homes and commercial property to profit from rising values before a possible "bubble burst" comes along to deflate them.

"Our market is hot" for primary and rental residential properties, according to Nancy Adelson, North Seattle Community College real-estate coordinator and instructor. While it has slowed a bit over the past few months, she says, it's "still stronger" than a year ago.

But fast fortunes in real estate, like any investment, are never a sure deal, Adelson cautions.

For example, popping bubbles can leave investors with mortgage debt greater than a property's value.

And while flipping has made millions for some savvy, and occasionally lucky, investors over the past few years, you also can end up investing more than you recoup.

Adelson's advice to increase your odds: Seek out experts. Take a real-estate class. Do your research.

Some ventures that appear to be great deals are beyond a buyers' reach. If the dollars and cents don't add up for you, consider these choices:

Wait: Don't want the fees and stress? Take some time and build up your nest egg.

Scale down: Try a smaller, less expensive project.

Grab a business buddy: Can't pass up a deal? Round up a partner to share the costs and work.

Check out private mortgage insurance: Ask about loans available for those who have as little as 3 to 10 percent. Such lenders typically require you to buy private mortgage insurance. Costs vary.

No. 1 most common: Buying a primary house or condominium to live in

Upsides

• Perhaps biggest tax write-off you can find. Tax advantage allows you to write off interest and property taxes. Federal government gives you a break when you sell the property.

• Potential appreciation and resale profit.

• "You get to enjoy it, use it, fix it up and you don't have to worry about the landlord increasing your rent," says Adelson. "You know what your payments will be."

Downsides

• Your money is tied up in your house, with only a few ways to get it out without selling. One option: refinancing (with fees attached). Another choice: generating a second mortgage, another debt against your property. Also possible: home-equity line of credit (you pay interest on money borrowed against your home's value).

• Maintenance expenses.

Who it's good for

Nearly everyone. Buyers qualify for various financing programs based on amount of their down payment (zero-down programs available with higher interest rates). "Even people who have terrible credit-card trouble or bankruptcies in their history can buy a home — but they are going to be paying much higher interest rates," says Adelson.

No. 2 most common: Investment properties (residential and commercial)

Rental investments: properties with four or fewer units. More common than commercial investments, residential choices sometimes attract buyers who live in one of the duplex, three- or fourplex units.

Upsides

• Rent payments can cover your mortgage payment.

• Tax benefits allow write-offs for interest, property tax and expenses. Depreciations on appliances may also be deducted.

• Potential appreciation and resale profit.

Downsides

• Down payments are typically larger than for single owner-occupied house purchases.

• Ready cash needed to overcome unpredictable expenses (vacancies, improvements and more).

• Personal time and labor, or hired property manager, needed for maintenance.

"You need knowledge to understand how to take care of your investment and how to rent your investment," says Adelson. "Some people do it themselves. Others hire property managers. But it's important ... to understand the state's [Residential] Landlord-Tenant Act," says Adelson.

Commercial investments can include residential buildings with five or more units (including large apartment buildings), small strip malls, shopping centers and retail/service properties; and larger-scale properties including hotels/motels, light industrial and self-storage facilities.

Commercial upsides

• Rent payments can cover your mortgage payment.

• Tax benefits allow write-off for interest, property tax and expenses.

• Potential appreciation and resale profit.

Downsides

• Dropping rental rates and vacancies can make it hard to rent space.

• After tenant turnover, re-rental can be difficult.

• Additional expenses often professional legal, financial and real-estate advice.

Who it's good for

• People with good credit, reserve accounts, and large (20 to 40 percent) down payments "who can afford to take a little more risk," says Adelson.

• Buyers willing to put in elbow grease and sweat equity for maintenance and rental administration — or hire property managers for these tasks.

No. 3 most common: second homes/vacation homes

Upsides

• Second home may appreciate in value.

• Personal enjoyment.

• Interest rates typically the same as for primary home, but greater down payments needed. No zero-down deals. Buyers may write off interest and property taxes, but will pay taxes on any resale profit.

Downsides

• No rental income allowed. For financing in Washington, a vacation home must be at least 60 miles away from primary residence, and must be single-family or condominium — no multi-plexes.

• Another home with maintenance needs.

Who it's good for

"Those with extra income, extra assets and extra time. A second home is good for those who have the time to enjoy it," says Adelson. "Second homes are investments. You have to research the market and get ahead of the wave."

Some other options

Buying land

Upsides: No rental or tenant headaches. Typically fewer maintenance issues. Potential appreciation.

Downsides: Typically produces no income. Expect higher down payments, loan fees and interest rates. No depreciation tax write-offs.

REIT (Real Estate Investment Trust)

For-profit companies that own and generally operate different types of property, including shopping centers, apartments, offices, warehouses and other rental buildings. Investors may own shares of these REIT stocks.

Upsides: Historically, REITs are less volatile than general stocks and have performed a bit better than other stocks.

Downsides : While some REITS are public and must meet specific SEC rules (pay 90 percent of taxable income to shareholders every year; invest at least 75 percent of its total assets in real estate; generate at least 75 percent of gross income from investment or mortgages on real property), others are private and require investors to do more precautionary financial homework.

Who it's good for

Those who don't want the headaches of direct ownership and management.

Copyright © 2006 The Seattle Times Company

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