If you are considering buying a vacation retreat or second home, you are not alone. A study last year by the National Association of Realtors (NAR) revealed a record 2.82 million second-home sales in 2004, up 16.3 percent from 2003. In fact, nearly a fourth of all homes purchased last year were for investment, and another 13 percent were for vacation homes.

What's Fueling the Interest?

Since the September 11, 2001, terrorist attacks, more Americans have turned to vacation retreats as safe, quiet alternatives to resorts and crowded tourist destinations. However, according to the Texas A&M Real Estate Center, the number of second homes was rising even before 9/11. Center statistics also show that vacation homes totaled 5.5 million in 1990 and 6.4 million in 2000, and could reach 9.8 million in the next five years.

The most frequently cited reason for purchasing a second home is to diversify portfolio investments, however. Low interest rates mean more people can afford second homes and, with second home selling prices up 27 percent since 1999, they are an attractive alternative to lackluster returns on stock and other investments.

Who's Buying?

The typical second-home buyer is a baby boomer, 55 years old, with a household income of $71,000, according to the NAR survey. "Because the typical second-home buyer is a baby boomer, it's likely over the next decade that second-home sales will remain relatively high," notes David Lereah, NAR's chief economist. "The boomers are still in their peak earning years and have both the wherewithal and the desire to purchase vacation homes and investment properties."

Farm Credit lenders say demand is strong for country getaways, and that buyers typically fall into one of two broad categories. "Offices close to population areas are experiencing high demand from 'lifestyle/country living' purchasers," notes Robert Echols, senior vice president with Heritage Land Bank, ACA in Greenville, Texas. "These buyers typically are looking for a tract of land located close enough to their workplace that they could eventually commute to work. While their ultimate goal is to get out of the city and enjoy a country lifestyle, the transitioning period often puts them in the 'second homeowner' category."

Many build a barn, shop or structure with small living quarters, which over time is expanded into a permanent dwelling or converted to a guesthouse or party room after the permanent home is completed.

The other common type of buyer is one looking for recreational tracts that can serve as weekend getaways. "These are usually more remotely located, with hunting and fishing as big drawing cards," Echols says. "These tracts typically are not within drive time for work commutes, and are usually larger tracts than the lifestyle purchases."

Tax Incentives

Some second homeowners can reduce their income taxes by renting out their vacation home. Tax treatment varies, depending on the number of days the property is rented and the number of days of personal use. "Potential purchasers should consult with their accountant or tax preparer on the tax advantages of paying cash or financing the purchase, and on the deductions from regular income that can be charged off," recommends Echols.

Financing Options

Just as the market for second homes is strong, so is the market for second-home financing. "The vast majority of these types of borrowers are financially strong, with good proven income streams," notes Echols. Farm Credit lenders are able to successfully serve the second-home-buying market with competitive rates, flexible terms and patronage dividends.

"Day in and day out, Farm Credit can offer the most flexible packages with the terms, structure and conditions that are a perfect fit for second-home borrowers' needs. By capitalizing on the patronage refund and dividends being paid by Farm Credit lenders, we are usually able to beat any commercial lender's package," Echols says.

Other financing options include owner financing, home equity loans, cash and IRS 1031 tax-free exchanges. "Many times these purchases are made by multiple buyers, such as family partnerships or a group of friends. By pooling their resources, they can acquire a larger tract of land than would be possible individually," notes Echols.

Farm Credit financing for second homes is based in large part on the financial strength of the customer. Another important factor is how the property will be managed: owner-operated, custom-farmed or leased out. Interest rates and loan terms typically are similar to those for other Farm Credit mortgage loans.

When considering the best lender for your second-home purchase, don't overlook the importance of convenience and local knowledge. "Local lenders are more familiar with the area, have greater knowledge of land values and local farming and ranching customs, and know local operators who can look after the property in the owners' absence," says Echols. "Purchasers should weigh all those factors, along with the financing package itself, to select the best lender for their situation."

- Sue Durio

The Scoop on
Second-Home Buyers

According to the National Association of Realtors' 2005 Profile of Second-Home Buyers:

The typical vacation-home buyer is 55 years
old, with a household income of $71,000.

86 percent do not rent out
their vacation homes.

The median distance between a vacation home
and primary residence is 49 miles.

Nearly half of second-home buyers used their savings for a down payment.

27 percent will use their second home as their
primary residence after retirement.