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Buying

Should You Buy That Vacation Home or Stick With Renting?

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vacation home ((c) Gary John Norman)

If you're lucky enough to have found your "happy place" -- that magical destination you return to year after year to get away from the hustle and pain of everyday life -- you've probably at least considered what it would be like to make the arrangement more permanent. You've given some serious thought to the enticing concept of buying a vacation home rather than renting one.

You'd have plenty of company. Vacation home sales soared to 1.13 million in 2014, according to the National Association of Realtors. That's the highest level since the NAR began the survey in 2003, and a 57% increase from 2013.

Just because buying a vacation home sounds like a dream, however, doesn't mean that it would be one. Answer these questions to see whether it makes sense for you, or whether renting is the way to go. (Would you prefer to win a fabulous waterfront retreat? Enter the HGTV Dream Home Giveaway 2016 here!)

Can you really afford it?

No matter how you slice it, buying a second home is an enormous financial commitment. In addition to being able to handle two simultaneous mortgages, you'll need to factor in the cost of furnishing the second property, paying for utilities, and taking care of maintenance. The cost of insuring a vacation home can be more expensive as well, because it tends to be clustered with others in flood- or wind-prone areas and left vacant for large portions of the year.

"There's a whole second set of expenses that people don't think about," says Rocky Lalvani, a real estate investor and financial coach in Harrisburg, PA. "Besides the furniture, you're going to need to want a second set of towels and sheets, a second set of plates. A second set of everything. You've got to add up all those costs."

How often will you actually use the property?

If you're planning on spending less than a month or two every year at your vacation home, you're probably better off sticking with a rental. Consider how easy it is to commute from your primary residence to your vacation home, and whether that's a journey you'd welcome making every weekend or long holiday. Remember that as the owner, you'll be spending part of your time "opening" the property, and cleaning and securing it before you leave.

Thinking of buying a vacation home in an area where you haven't vacationed often? It can be a smart move to "try before you buy," says Tammy Barry, director of sales and marking for Heritage Harbor Ottawa, a marina resort community along the Illinois River. Barry recommends that potential buyers do a full yearlong rental in a vacation destination before purchasing a second home there.

"You're buying a lifestyle, and you want to make sure that it meets the goals of your family."

Are you really going to rent it out?

Lots of vacation home buyers think that they'll offset their costs by renting out their property when they're not using it. While this can be a fine strategy, it may not be as simple as it seems. If you're financing the home, renting it out means lenders will consider it an investment property and offer you less favorable terms. And if you use the home more than two weeks per year, you'll lose some of the rental property deductions offered by the IRS.

And of course, the most profitable times to rent out your vacation home are during peak vacation season -- exactly the times when you probably want to use the place yourself.

What's your long-term plan?

OK, once you get past the short-term buy vs. rent conundrum, there are other financial considerations -- especially if you may think of moving into the place when you retire. If that's the case, get ready for a whole new set of considerations. Will you be comfortable aging there? Does it have a master bedroom on the first floor, for example, and convenient access to good health care?

If you can find a property that fits the bill, you'll get the best of all worlds. It can be done!