If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Many of us dream of the second home in the mountains or  at the beach.We would love to have the ability to “get away” for a while. But an interesting syndicated article by real estate  writer Jeff Brown pokes holes in the economic advantages of owning a second home. And it shows they are a luxury most of the time, not an investment.

Second homes and investment properties are hit hardest in a cooling market because people don’t need them. Sales of primary homes are always bolstered to some extent by first-time buyers and people who for one reason or another have to move.

…

Expenses of maintaining and running a second home can be offset by renting it part of the time, but to get the biggest tax benefit on a rental you have to severely limit your own use. Also, dealing with renters can be a terrible headache - or a big expense if you hire a manager.

But what about a second home acquired primarily or exclusively for your own use? That’s like any indulgence - if it makes you happy and you have the money, go for it.

But study the numbers. With real estate, many people focus on purchase price and sale price, figuring that if the second figure is bigger, they’ve made a profit. To be accurate, you should look at all the costs.

Say you bought a place for $300,000, borrowing $240,000 at 6 percent. Suppose the property appreciated 6 percent a year - about double the inflation rate. After five years, the property would be worth just over $400,000, for a $100,000 “profit” on the $60,000 initially invested as the down payment. But interest would have cost about $70,000, reducing the profit to $30,000.

A $30,000 gain on a $60,000 investment over five years is an annual return of about 8 percent, which is nothing special.But you might also have paid $5,000 a year in real estate taxes, and another $1,000 a year in homeowner’s insurance. That’s $30,000 over five years - wiping out your profit.

If you pay a standard 6 percent Realtor’s commission to sell the property, you’d be $24,000 in the hole. And we haven’t considered maintenance and utilities, cost of furnishings and traveling to the property. Sun Herald

This is an interesting look at the second home marketplace. If you can  afford it as an extra in your life, outstanding. If you are looking at it as a way to build your nest egg, think again and maybe look to other investments instead.

Related posts:

1. Student Housing: A Great Niche Real Estate Investment
2. Want a Great Investment in Real Estate - Head to the Farm
3. Investment Derivatives to Protect Home Appreciation
4. Motley Fools ask, is your home worthless?
5. Why Overseas Investment in Real Estate Makes Sense