For most people, buying a vacation home may be one of the most significant purchases they will ever make. Potential buyers are often overwhelmed with sales pitches, website postings, and brochures that promise fun, happiness, and the good life.

However, the most attractive homes in such places as Florida and California, or luxury mountain cabins, lakefront property throughout the country, and even offshore habitats, require large financial commitments. This mean it’s vitally important for potential buyers to clearly understand both the features and benefits, and the potential financial conflicts and shortcomings of any vacation home purchase.  

A lot of the demand for vacation real estate is driven by baby-boomers as they near retirement and want unique quality of life experiences, but many other buyers are also interested in vacation housing retreats and getaways.

What Are You Looking For?

The variety of choices in the vacation home ownership industry are commonly classified in two distinct categories: Time, which is the right to use a property for a defined period, and Equity, in which owners have an actual stake in the real estate.

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Time Ownership

Vacation Rental: Renting a furnished room, apartment, or house for a defined short-term stay.

Destination Club: Accessing a variety of luxury homes in multiple locations. In this choice, you will generally not have any equity or ownership of the actual real estate. However, one note of caution – this category has seen bankruptcies and reorganizations, which will affect future investments.

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Time Share: Acquiring a specific length of time in a unit located in a vacation resort, usually for one to two weeks. Choices include fixed and floating weeks.

Equity Ownership

Sole Ownership: A single owner with 100% ownership and full responsibility for maintaining the property, in which you have a deed on a second home. In resort destinations, owners often hire a local management company to look after the home.

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Some owners also decide not to recoup rental income because of the extra work involved.

Condo & Hotel: Condos and hotels offer a portion of their rooms for sale to individual buyers. Each investor owns the condo deed to a specific hotel room or suite and pays property taxes, insurance, maintenance fees and other costs. Owners use the unit whenever they like, and the hotel rents the space the remaining time and pays a portion of rental revenue to the owner.

Fractional Ownership & Private Residence Club: These are both forms of Fractional Ownership, and usually a less private or personal form of shared ownership. A group, possibly 10 or more owners share the costs and use of the vacation property, which is usually a resort or hotel. Fractional Ownership is mainly smaller, about two to four weeks, because people usually buy only what they will use. These units are usually offered by real estate developers or hotels. In this set-up, each co-owner owns a percentage of the property and his or her name is on the title and the deed.

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To Buy or Not to Buy

Potential buyers need to determine whether they are looking for an investment property, a getaway, or a place to retire, because there are some important steps involved in these decisions.

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Does a second home make sense financially? Many second-home owners complain that the house, including the purchase price and ongoing expenses, end up costing more than they imagined. Buyers need to calculate likely expenses, such as hiring a management company, because you won’t be there every day, and buying relatively high priced hazard insurance, to protect your investment. Then you'll need to build up your cash reserve, said Craig Venezia, of Nolo.com, if you plan to rent the property. You will also need to determine how much rental income to expect, and whether it will cover your monthly costs.

What are the tax implications? Second-home owners need to be concerned with the variations in property taxes in both ownership locations, and income tax implications if you’re renting the property. Venezia notes that a little advance planning during the house-hunting process could save thousands of dollars a year.  For instance, sometimes buying a home just over a town's border can significantly trim the annual property tax bill. Also, if you're renting out a vacation property, the number of days you spend there can make a difference in how much you'll owe in income tax.

Finally, take steps to protect your second home. Protecting your property starts before you buy the home, and continues long afterwards, according to Venezia. You should get a proper home inspection before you buy in order to deal with any repair issues upfront. The mortgage lender will usually require buyers to get title insurance, in case problems such as previous ownership or debt claims on the property appear after the purchase. The lender will also require you carry hazard insurance, to protect your property against damage from theft, fire, flooding, or windstorms.

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The cost of insurance for second homes is usually higher than for first homes, since you won't be there as much. You will probably want to add liability insurance, covering you and members of your household for accidental injuries to your visitors.

As you can see, buying or renting a vacation home for that longed-for comfort and peace of mind could be more complicated than you initially imagined.