Investing in a Second Home

While some homeowners despair as the housing market slumps, some buyers see it as an opportunity to make an investment.  Real estate can be a better long-term investment than CD or money markets, because it offers more potential for profits.

Do you dream of having a vacation home to escape to on the weekend?   Now may be the perfect time to make that dream come true.  With the high quantity of available houses and historically low interest rates, it's a great time to buy.  If you have an extra stash of money that you've been saving for a rainy day, a second home could be a far better long-term investment than most fixed-income savings options, like a certificate of deposit (CD) or money market fund.

Benefits of a second home

Real estate is always a good investment...if you have the time and money.  Don't expect a return soon on your property investment like the one witnessed during the past few years.  In the recent bull market in real estate, you could sell a house a year after you purchased it and some times double your investment.  Now, the market is slumping its way back to "normal."  This means that property valuations are down, and there are many houses for sale.  It also means that there's no quick turnaround likely on your potential investment.

However, real estate has proven to be a good investment over the long-term.  In addition, there are tax advantages to purchasing a second property.  Plus, if you're willing to turn it into a rental property, the investment could be even more lucrative.

Investing alternatives to real estate

Because of the long-term growth potential of real estate, it may be a better "safe" investment than CDs. A CD is a savings certificate offered by lenders with a specific maturity date and fixed interest rate.  The term of a CD typically ranges from one month to five years, and is generally insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).  

Another common investment option is a "money market" account.  It offers many of the same benefits as CDs, however, it's more liquid, because money can be withdrawn at any time without penalty.    

Both of these investment options offer a relatively safe, if minimal, return on your money.  But if you can bear the risk of a bear real estate market, the reward can be much higher than CDs and money markets.

Second home negatives

When purchasing a second property, be prepared mentally and financially for everything that goes with it.  Another home will have taxes, insurance, utilities, furniture, and repairs just as costly as your primary residence.  Having a vacation home presumes that you'll have the money, time, and inclination to maintain it.  

Many may see the depressed housing market as a bad omen of things to come.  However, if you have money to invest, buying a second property could actually turn out to be one of the smartest long-term purchases you'll ever make.