Vacation Homes: Is Now the Time to Buy?

Deborah Rehyer of Vienna, Va. had just one requirement for buying a vacation home: It had to be waterfront.

Her search began in a region 90 minutes from her home, in Virginia's Shenandoah Valley. And her search ended on the opposite side of the state with a six-acre parcel on a tidal pond just off the Chesapeake Bay.

"Waking up in the morning is the best. I take my coffee out to the floating dock and watch the world wake up," Rehyer says of her vacation property.

Many of us visit vacation spots and wonder what life would be like to live there. Often, we pick up the real estate brochures searching for a cheap vacation home or the luxury house of our dreams.

Even as the national real estate market remains stagnant, professionals and experts say that the market for vacation homes may be the most attractive it's been in years, with prices down and interest rates low.

"If you're looking at getting a recreational home or a home where you think you want to spend most of your time in -- maybe the next portion of your life -- it's doable now. You can get in the door," says Tom Kelly, syndicated real estate newspaper columnist and co-author of "How a Second Home Can Be Your Best Investment."

The number of vacation-house purchases rose slightly in 2009, up 1 percent from 2008, according to the National Association of Realtors' 2010 Investment and Vacation Home Buyers' Survey. Although the number is still down from the vacation-home-sales heyday of 2005 and 2006, buyers are returning to the vacation-home market, the NAR says.

The typical vacation homebuyer has a median age of 46 and a median household income of $87,200. Half of all vacation home buyers in 2009 purchased their second home in the South; the typical property was a median distance of 348 miles from their primary residence, according to the NAR.

If you are among those considering buying a vacation home, think about the following before starting to expand your real estate portfolio.

Preliminary Analysis/Affordability

If you dream of owning a home away from home, start your search by determining how much home you can afford. If you haven't saved enough for a cash transaction, you'll need a mortgage, and the bank can help you determine what you can pay. Loan officers determine the amount of mortgage and type of mortgage for which you qualify based on several factors, including the amount of cash you have for a down payment, your debt-to-income ratio and your credit score. (Also see our guide: "How Much Home Can I Afford?")

Regarding the down payment, banks have gotten tight on requirements, often asking for between 20 percent and 40 percent for a down payment on a second home. Make sure you have money set aside for the down payment and closing costs.

To calculate your debt-to-income ratio, add your current monthly home payment, the projected payment of your second home and any other debt (car payments, student loans, credit cards, etc.) and compare it with your monthly gross income. Know that lenders will not give loans to those who have a debt-to-income ratio of more than 36 percent, so consider this in addressing your price range.

Also, make sure your credit score is in its best form. (Still wondering how much home you can afford? Check out AOL Real Estate's Mortgage Affordability Calculator.)

Then ask yourself the following question: Do you plan to rent out your vacation property? NAR says only one in four vacation homebuyers plan to rent out their properties to others. But one in five investment homebuyers plan to use their purchases for personal vacation use and/or as a family retreat. (Also see our guide: "Rent Out Your Home as a Vacation Property and Make Money.")

The difference between a vacation home and an investment property, according to the Internal Revenue Service, is 14 days: If you rent a house out up to 14 days a year (which you can do tax-free and still qualify for mortgage deductions on your taxes), it's a vacation home; if you rent it out and spend less than 14 days per year in it for personal use, it's an investment property. Make sure you calculate the tax ramifications when considering what you want out of a property.

Still worried about affordability? Consider shopping to buy a vacation home and asking the owners whether they are interested in owner-financing, Kelly says. "Ask what's possible. If an owner sees a terrific family that's willing to put 10 to 15 percent down and will cash them out in five years, they may be amenable."

The Fun Stuff

Beach, mountains, island getaway, rural retreat? When looking at homes, make sure it has something special – a view, proximity to main attractions, a three- or four-season resort with vacation appeal to all or waterfront. Finding a place that has one quality with universal appeal boosts one's enjoyment of a space and is good for resale. "Chances are if you like something about a place, others will too," Kelly says.

A rule of thumb for buying a vacation home is to find one within a three-hour drive of your primary residence so it's accessible on weekends. Kelly says people tend to stick with this rule, mainly because they enjoy a close corps of friends and family at their primary residence and want to stay close. Still, the NAR reports that 50 percent of vacation homebuyers in 2009 purchased a home 500 or more miles from their primary house, so don't restrict your search if you, say, live in Ohio and really want a home on North Carolina's Outer Banks.

Taxes and Oversight

A quarter of buyers who purchased a vacation home in 2009 intend to use it as a principal residence in the future, the NAR says. Many vacation homebuyers look for potential retirement homes. Owners avoid paying capital gains taxes when they sell their principal residences, so if they move into their second residences for at least two years, they can sell that house without paying capital gains.

Joy and Cliff Williams of Williamsburg, Va. took the opposite tack. They left their primary residence, an 18th-century historic home in the country that Cliff restored in the 1970s, to move into town. But they didn't want to give up their rural retreat, so they decided to rent it out as a vacation destination. Using by HomeAway and other websites, Cliff Williams now manages the house, Lightwood, as a side business and the Williamses have been able to keep a precious asset. "It was a leap of faith as to whether it would work, but it did, " Joy says. "We get people from as far away as Australia and Britain renting out our property."

Kelly says that Internet sites like and have eased the challenges of renting out vacation homes, so he encourages buyers sitting on the fence to keep an open mind regarding renting out their dream homes.

"I think people underestimate the number of people who are interested in renting vacation homes rather than staying in hotels," Kelly says.

They also overestimate the amount of time they'll spend at their own vacation home, he adds. But don't let that scare you. Vacation homes, he says, are a lure for family and friends. As a vacation homeowner himself, he's hosted many family gatherings in the mountains near Seattle. "You can't put a dollar sign on that stuff. Those are family memories we got," Kelly says.

Looking to buy a second home, or your first? Here are more AOL Real Estateguides to help:

More on AOL Real Estate:
Find out how to
calculate mortgage payments.
homes for sale in your area.
foreclosures in your area.
property tax help from our experts.

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