A Vacation Home: You can have fun and make money too

WITH INTEREST RATES as high as 18 percent, financing a home is a major accomplishment. After mortgages and taxes are paid each month, most bank accounts are drained. What’s left is to be cherished. Carefully nurtured. Wise old bankers may tell us the stock market is the place to invest, but you can’t invite your friends to join you for an apr坢s-ski get-together or a beach bash on Wall Street. So, what about buying a resort condominium? Despite old adages about swampland peddlars, some resort property-especially condominiums -provides a great place to sink discretionary money.

The resort industry is taking off. The most desirable vacation spots are selling out quickly; unflinching developers are moving on to second-choice areas. Prime beach property in the United States is almost sold-out, and developers have begun to promote less-desirable bay areas. Some developers predict we’ll run out of resort condominium space by the end of the century.

Now-or-never rumors make pulling the plug on the old savings account and rushing to the nearest Realtor a powerful temptation. But slow down. Like any booming industry, the resort condominium business has been victimized by fast-buck operators. And remember, resort condominiums have only been available in the United States for about 10 years, so legislation protecting consumers is slow in coming. In order to wisely buy resort condominiums, consider these pearls of advice.

The first point may seem elementary, but it’s far from simple: decide whether you’re buying as an investor or as a user. The word “investment” is not generally used regarding real estate because real estate cannot be advertised as an investment; the speculation is too great. But deciding between buying for personal vacation time and buying to rent to others can save you money.

The Tax Reform Act of 1976 denies any tax shelter to those owners who personally use their resort condominium unit more than 14 days a year or 10 percent of the time it is rented, whichever is less. If, like most people, you’re allowed only two weeks of vacation time a year, you could rent out your condo the rest of the time and enjoy the benefits of depreciating your assets. The mechanics are simple.

There are essentially two types of expenses involved in a real estate purchase: “hard” cash costs (interest expense, operating expense and maintenance) and “soft” non-cash costs (depreciation). A smart investor/owner can use both hard and soft costs to offset rental income for tax purposes. As long as cash revenues are offset by cash expenses, the non-cash depreciation costs can be used to generate a tax loss, which will reduce the investor’s personal tax liability. This tax savings reduces the cost of owning the condominium.

The user/owner may deduct hard and soft costs only in proportion to the amount of time he rents the condominium to others. The tax code limits the deductions, so the user/owner cannot generate the same accounting loss that the depreciation expense provides an investor/owner.

If you decide to become an investor/owner, you must treat your purchase as an investment. In doing so, consider your liquidity-your ability or inability to readily turn your investment into cash. With regard to liquidity, there are two basic ways to buy: as a partner in a public or private-limited partnership or as a condominium unit owner. According to Peter Gunnar, coauthor of Management of Hotel and Motel Condominiums, your investment is not very liquid if you are in a partnersnip.

To get to your money, you must first comply with limitations on the transferability of the partnership. This takes a fairly long time and thus ties up your capital. Unit ownership, on the other hand, is more flexible. There is no restructuring of the condominium when one owner leaves, and the resale is generally quick.

Perhaps because of the tax breaks, investor/owners outnumber user/owners. Since resort condominiums sold through limited partnerships are considered securities, a growing number of developers are registering their property with the Securities Exchange Commission (SEC). Total disclosure, a requirement for registration, puts all the cards on the table before any transaction takes place.

“I think SEC regulation is essential for the developer. If he hasn’t registered, he can’t prove what he’s told his customers,” Gunnar says. “By the same token, registration helps the buyer immensely. Instead of having an informal presentation where some salesman scribbles some figures on the back of some brochure, he is given a prospectus that lays out all the facts so there is no question. Registration is designed for buyer protection.”

Purchasing a resort condominium as a security is fairly straightforward – if for no other reason than because those who are able to invest $80,000 in resort property are usually well-accustomed to dealing with such transactions. But what about the small-time buyer-someone with $5,000 to 10,000 to spend on a resort condominium? Within the past seven or eight years, an option known as time sharing has been introduced. With time sharing, one condominium unit is sold to a group of people, rather than to one buyer. Each buyer is allowed the unit for a certain period, usually one week each year. One share costs about $6,000.

If a vacation is all you want, time sharing can be perfect. Advocates say the consumer can “lock in” vacation costs for years ahead at current prices. But if investing is your motive, back off; you’re in the wrong neighborhood.

“We don’t use the term ’investment’ when talking about time sharing,” says Victor Parra, director of services for the American Land Developers. “That implies that the value will appreciate. We don’t believe that time-sharing purchases should be made as investments. Interest rates are so high now that it’s impractical. Also, the concept is so new, we don’t know where it’s going. In the past few years, though, values [time-shared] have depreciated. We need to caution the consumer.”

Time sharing is sold three basic ways: You can acquire ownership, lease the property or invest in it as a security. With ownership, each one-week purchaser actually owns one fifty-second of the property. Each buyer receives a deed, and the property is treated like any other piece of real estate. The owner may sell, rent or will his property.

The lease form of purchase simply gives the buyer a “right to use” the property. The cost of this form of real estate is generally less than ownership, but so are the benefits. The lease form allows occupancy of the condominium for a specific period each year, but allows no ownership interest in the property. No deeds are distributed. Once an owner’s lease has expired, he has nothing.

Mortgage financing is not available for the purchase of time-shared property. A small down payment is usually made, and the balance is financed either personally or through the developer, usually over a five-year period.

The third type of time sharing-securities-can be sold in only a few states. This type of time sharing is considered an investment and falls under securities regulations.

There are some universal precautions to heed when buying any type of resort condominium. Gunnar says the Rockies, Florida and the southeast United States, particularly South Carolina, are current boom areas. Hawaii still has the largest number of resort condominiums, but, because of the increasing cost of travel, its popularity is slipping, Gunner says. This slump in business makes now an ideal time to find some good deals in the area, he says. Some local Realtors also say the Texas coast is a popular area.

Since resort property is most often many miles from its owners, management is another key to success. Be sure your management company is reliable (call the local Better Business Bureau), and that the costs are reasonable -not too high or too low. Often, low maintenance fees are used as a major selling point, but either end up escalating quickly or representing poor management. Make sure the managers aren’t locked into an unreasonably long (perhaps 20-year) contract.

When signing the deed, make sure you’ve read all the fine print. Don’t assume that a deed is a deed. Gunnar says the best kind of deed for resort property is a warranty deed, which protects the buyer from liens on the property.

Once you’ve done your homework, checked out all the options and think you’re ready to purchase a resort condominium, take one final and most necessary step: Consult a real estate lawyer before signing. Though the lawyer’s fee may run from $50 to $100, it may well be the best-spent money of your purchase.

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