1. Now is a good time to pounceIn many second-home hot spots, prices are still close to their five-year lows. According to Fiserv, single-home prices in Napa, Calif., for example, are down 24% less than they did in 2006. And though a few hard-hit markets like Las Vegas, & Tucson could fall a bit further, most economists believe the biggest declines are behind us. But if you are around water... the story seems to be different. Sales in places such as Myrtle Beach, S.C., and Palm Beach saw double-digit increases last year.
2. A home may be a better deal if it's rentableYou may think you'll keep the retreat all to yourself, but it's still smart to shop as if you're going to rent the place out. That's because a home's rental potential can affect its resale value. Before you bid on a house, you may want to make sure the homeowners association or township allows short-term rentals (many do not). And keep in mind that renters prefer homes with at least one bathroom for every bedroom.
3. Don't count on rental income to pay your billsThe typical property rents out just 17 weeks a year, says Christine Karpinski of vacation-rental site HomeAway.com. Plus, you'll need to pay for cleaning, maintenance, insurance, and maybe management fees (at least 15% of income).
4. Your loan rate depends on how you use the houseLenders have raised standards across the board, but they're giving extra scrutiny to vacation homes. Use the property primarily as a second home and you'll pay about the same mortgage rate as you would on a primary residence.
5. Tax benefits can be sweetRent the house out for two weeks or less and you won't have to report a cent of income to the IRS -- and you can still deduct property taxes and mortgage interest.
Stay there for less than two weeks or 10% of rental days, whichever is greater, and you can deduct operating costs -- everything from cleaning fees and maintenance to linens and repairs -- in addition to interest and property tax. Use and rent a lot? You'll have to allocate the write-offs between personal and rental use, which can get tricky.