Vacation home as investment

A: Sales of vacation homes surged 20% last year alone, according to the National Association of Realtors. Prices also rose sharply, often in excess of 20% in hot markets. The typical buyer is a baby boomer, 55 years old, who made $71,000 in 2003. The average price paid for the vacation home is $190,000. The current boom started almost 10 years ago and is fueled by low interest rates, easier lending terms, low capital gains tax rates, other tax advantages including deductibility of interest expense, an overall strong economy, and a growing buyer population. But each of these factors has a history of being cyclical; meaning they may not be as favorable in the future. It is hard to imagine a scenario that would be more favorable to vacation home ownership. So this means that the trend is great now for as long as it lasts, but do not expect this pattern of appreciation to last forever. Consider the fairly recent history in the second half of the1980s to the middle of the 1990s where many vacation property values remained relatively stagnant for almost a decade. Ideally, you will want to invest in other real estate (not counting the primary home), as well as a diversified portfolio of stocks and bonds in addition to a vacation home; perhaps easier said than done for a typical middle-income investor.