Undoubtedly, some of you are spending your summer in a lake-side cottage, a golf-course resort or somewhere exotic. You may wonder to yourself, while you are lounging in the sun, what it would be like to purchase a 2nd home or vacation property if you don’t own already (I am going to use the terms interchangeably in this post to refer to anything that is not a principal residence or strictly purchased as a 365 day a year investment property). Whether it be a cottage, a Mexican beach-house or a little farm-house with no plumbing, what are some factors to consider when purchasing a 2nd home or vacation property?

Careful you don’t over-reach

According to the National Realtors Association, the average America vacation home buyer in 2008 was 46 years old, had a median household income of $97, 200 (USD) and the medium vacation home was 316 miles/508 km (!) from their primary residence. 89% of vacation home purchasers were purchasing for a family retreat.

The bottom line is that most “average” vacation home buyers are older and making almost double the average American household (the median American household income was approximately $50,000 in 2007) and had the money to travel long distances to their vacation home. One needs to be in this category to afford what is ultimately a luxury. If you considering purchasing a cottage, just remember what type of demographic plays in this field and careful you are not over-reaching to keep up with the Jones.

Vacation properties tends to be one of the first real estate niches to collapse in a downturn

A real estate agent once said to me that you can tell when the real estate market is beginning to dip since vacation property prices begin to dip. Given it is a luxury for most, vacation properties purchased with an eye to future appreciation in addition to enjoyment tend to have much larger downsides than other real estate uses. After all, an investment property can be rented out at a loss in a worst-case scenario.

It is difficult to sell or refinance a vacation property outside large urban areas when there is no demand for this type of real estate. Just remember that it is a buyer’s market for vacation homes for a reason.

Vacation properties can be break even propositions- assuming you are willing to work on it

A MSN Money article estimated that it would take 15-17 weeks of rental income to break-even on a vacation home. As the article also indicates, the best way to break-even or make money on a vacation home is to cut out the management companies and become a DIY landlord.

For those of us who are looking at vacation properties north of the Mason-Dixon line, you know that the enjoyable cottaging season (as we like to refer to vacation homes) is quite short (May long weekend to maybe the first weekend of October). Thus, if you are renting out your vacation home, you may have to give up a lot of time during peak season for rental uses, which undercuts the primary reason to own a vacation home.

Additionally, there’s just the sheer maintenance of the place- for others to enjoy. One may end up toiling away for other people’s enjoyment and is that what you really want out of the property?

Taxes do not tend to favor vacation homes

If you are a non-resident owning a vacation home (for example, a Canadian buying Florida property), some jurisdictions charge multiples of property tax to non-resident owners and waive any cap on property taxes (some jurisdictions have a freeze on property tax).

If you rent out vacation homes and you are a non-resident, you may be subject to withholding tax as well (30% if you are Canadian renting out U.S. rental properties). If you are a U.S. resident deriving rental income from a vacation property located in the U.S., if you live in the home for an enumerated period of time (the greater of 14 days or 10% of the days you rented out the property), you may be denied certain deductions as well (specifically, the interest deduction).

The point is always consult an accountant when purchasing or renting a vacation homes. Tax codes tend not to be friendly towards vacation properties given governments also consider these properties luxury items and have not bent over backwards to accommodate vacation home owners like owners of the principal residence.

Why do you want a vacation home?

In spite of the above, it really comes down to answering the “why” question first. Why do you want to buy a vacation home? For some who grew up in the country, it is a way to get back to nature. For others, vacation homes may be located close to extended family. Others still buy vacation homes for recreational purposes (boating and golfing come to mind).

If it is something that fits into your life and it is who you are and not what you do, and assuming you can afford it, all the commuting and maintenance are worth it.

Best wishes for an enjoyable summer.