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Before You Buy a Vacation Rental Home

BEVERLY HILLS, Calif. (MainStreet) -- Record low interest rates and deteriorating home prices have brought a growing number of second-home buyers to the market -- in many cases, all-cash buyers looking to get a better return on their money through a vacation rental business than they can on traditional CDs or stock investments.

But operating a vacation rental business with your second home is not as easy as it sounds -- and the biggest mistakes you will make are likely to come long before you even buy.

A property may look good for use as a vacation rental, but there are many pitfalls to avoid even before purchase.

Here are some key tips to help you avoid second-homebuyers' remorse:

Find destinations with a long season
Try to invest in a market with the longest high season, which will extend the calendar time you are able to rent your second home at a premium. Destinations such as Lake Tahoe or Mammoth Lakes in California are likely a good sell during winter ski season but could be tough to rent during slower spring and summer months. Ditto for Palm Springs, which goes from 115-degree summers to chilly 40-degree nights in winter with a tight four-month high season. Unfortunately, few destinations are like Hawaii or Aspen in terms of their year-round appeal.

Consider locations abroad
One of our biggest investment regrets has been missing the boom of Uruguay's Jose Ignacio; homes selling in the $100,000 range a little less than a decade ago go for upward of $800,000 now. The idea of paying all cash for a house abroad and never fully understanding local real estate laws made us hesitate, but risk-takers can also reap rewards. With high-season rental rates that average around $1,000 a night and up for two-bedroom houses, Jose Ignacio is but one example of how a simple capital investment in up-and-coming vacation hot spots can yield impressive long-term returns in addition to capital appreciation.

The currency play
If you're one of those people who have always dreamed of a villa in Tuscany or farmhouse in France, consider that the European debt crisis and depressed real estate market makes that dream more affordable now than it has been in years. Using currency as a means to access key real estate deals is one of the best incentives for entering a foreign market that may be unfamiliar or previously out of budget. A posh English castle may just be in your real estate future.

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