Second Thoughts On a Second Home

NEW YORK ( TheStreet) -- The housing market is clearly picking up, making a home purchase a safer move than in recent years. But what about a second home -- a place at the beach, lake or in the mountains?

In a nutshell, all the considerations that guide a first-home purchase apply to second homes, making that market look more appealing that it has in years. But the additional risks involved in owning a second home suggest prospective buyers should proceed with caution.

Recent data show that in most parts of the country home prices have started to lift off the bottom, and mortgage rates are still extraordinarily low. A home bought now could be a bargain, assuming you can weather any downturns if the fiscal cliff or other factors cause the economy to falter.

But the market for vacation homes is different. Since second homes are a luxury people can do without, values can falter very quickly when worries about jobs and income make people more conservative. So with the market for primary homes improving at only a very slow pace, gains in the second-home market can be expected to be even slower.

That means the prospective buyer should have real staying power -- the financial resources and strong stomach for weathering setbacks. Because a "round trip" -- purchase and sale -- involves multiple expenses such as title insurance, loan fees, transfer tax and Realtor's commission, it could take years for a second home bought today to grow enough in value to break even on a sale.

This, in other words, is probably not a good time to speculate on a second home as a money-making investment. It's probably best to buy a second home only if you expect to enjoy it yourself for many years -- at a financial loss if necessary.

Many second-homeowners plan to offset expenses by renting their properties part of the time. In many parts of the country, the rental market is quite strong, with rents driven up by demand from people who would prefer to own but cannot for various reasons, including being unable to qualify for a mortgage under today's stringent lending standards. This, combined with low prices, has brought many investors into the housing market, helping lift home prices off the bottom.

But it's important to remember that these factors strengthen the market for homes used as primary residences -- for renters who work nearby and send their children to local schools. The demand for a rental home to be used for a one- or two-week vacation might be very different. Vacations are a luxury cut back easily in tough times.

On the other hand, a vacation rental is a luxury that doesn't require a long-term commitment. Even a family that's had a few financial problems may decide that a week or two at the beach is worth the expense.

It's very hard, then, to predict which force will prevail among prospective renters -- the need to cut back or the urge to splurge. Anyone thinking of buying a second home that will be rented out part of the time should explore the local market very carefully. What's the property's rental history? What's the economic health of the areas that supply the community's renters?

And, of course, if the second home is in a community that levies association dues and other costs, it's important to research the association's financial health. What percentage of members are delinquent in dues? How many properties are vacant, for sale or owned by lenders? Is the association imposing any special assessments or likely to? The health of the community will tell you something about the strength of the rental market.

You get the picture: The same factors of low prices and mortgage rates making primary homes more attractive may make the second-home market a better bet as well. But unless you can handle a shortfall in rental income, and unless you plan to hang on to the property for many years, the traffic light for second homes is still on yellow.