A vacation home is not for everyone. If you don’t have the funds or income to carry the expenses of owing a vacation home, now is probably not the right time to invest in one. Remember, if you own a primary residence as well as a vacation home, you will be making two monthly mortgage payments, two property tax payments, payments on two sets of utility bills, and so on. But if you can afford the cost of owning a second home, vacation properties can provide you with a great opportunity to take advantage of the real estate market. Perhaps more than any other property type, vacation homes offer the potential for considerable price appreciation over the long term. But there is no such thing as a free lunch. Vacation properties are expensive to purchase and expensive to maintain. In most cases, you are spending a good deal of money each month to carry the property. The payoff could be significant in the end, but the costs of getting there are not small. Vacation property ownership is not for everyone. But if you can afford to take this step, here are some of the benefits of vacation property ownership:

A vacation home is usually a property where you plan to spend a significant amount of time away from your primary residence. Many people use their second home for recreational purposes, as a way to fold into their lives something that they otherwise can’t get – a peaceful rural setting, a nearby golf course, a mountain slope for skiing and summer recreation, a lakefront view, or an Oceanside retreat. Some people buy a vacation home for the future, as a place to which they plan to retire. Some rent it out when it is not in use, helping to subsidize the cost of owning and maintaining it. Buy by definition, a vacation home is not a rental property – it is used primarily by the owner. If you own vacation property and rent it out for less than fourteen days, you are allowed to treat the property as if it were a primary residence for tax purposes. Since a vacation home generates a negative cash flow for most owners (the expense of ownership almost always exceed any rental income it brings in), you will be able to deduct property and mortgage interest. You are allowed to deduct the interest associated with the first $1 million of debt used to purchase, build, or improve your principal residence and one vacation home. These deductions, however, are reduced for high-income taxpayers, as with any deduction. At a certain income level, the IRS no longer permits you 100 percent of itemized deductions; it begins a small phase-out of these deductions – including mortgage interest. (Please see your accountant for more information). If you do not rent out your vacation home for more than fourteen days per year, you pay no tax on rental income. However, you cannot deduct rental expenses.

You need to calculate and compare the before-tax annual and monthly cash flows of the condo over a range of bid prices. As you begin the bidding, have a firm idea of how much you can afford to pay out to “carry” the property. For example, you may be willing to pay up to $300 per month to own the rental property. So the maximum price you can bid will be a price that generates a negative monthly cash flow of $300. Prices lower than the maximum will generate lower negative cash flows, which improves your investment position.

Investing in rental property requires a strategy quite different form the one employed in purchasing a home. The acquisition of a rental property is a business decision, an it has to be made in a businesslike way. Once you’ve identified a property that could be a good investment, you have to estimate the property’s current value, project its future value, and make a realistic assessment of how much rental income you can expect to get from the property, versus anticipated expenses, in order to arrive at the property’s profit potential. You want to get expert advice about the benefits of depreciation and tax write-offs. Your calculations must be based on how long you plan to own the property and what it will take to manage the property over that period of time. Your calculations should also reflect whether you think you can personally manage the property or will need to hire a professional manager to do the job.