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A Second Home--for Now
In the coming decades, baby boomers will only be driving prices up
By SUSAN SCHERREIK Business Week Online

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.

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!''