The following is an excerpt from Christine Karpinski's book, How to Rent Vacation Properties by Owner, 2nd Edition: The Complete Guide to Buy, Manage, Furnish, Rent, Maintain and Advertise Your Vacation Rental Investment (Kinney Pollack Press, 2007, ISBN: 0-9748249-0-9, $26.00).

If you have ever attended one of my seminars, you have probably laughed about the slide in the presentation pointing out the “cons of owning vacation rental homes.” The slide says, “Be Careful it's contagious! Once you buy one, you want to buy more and more and …more.”

And now there is research to back up this statement. According to a second home study released by the National Association of Realtors in May of 2006, a surprisingly high number of vacation home owners, 21 percent, own two or more vacation homes. And in a HomeAway.com survey of vacation rental owners who advertise on their sites, 32 percent reported they own two or more vacation properties. So the numbers imply that multi-property ownership is contagious for one-quarter to one-third of vacation rental owners.

If you'd like to join this phenomenon of multiple vacation rental ownership, here are a few guidelines that might help you get there.

Deciding where to purchase

When you're looking to purchase another property probably one of the biggest dilemmas you'll face is where to purchase your second vacation rental home. There are two simple choices: Buy where you already own or purchase in an entirely different area. We'll explore both.

Buying where you already own. There are many advantages to purchasing a second vacation rental property in the area where you already own your first vacation rental property. The most obvious reason is you're already quite familiar with the area. Because you know the prices of homes in your area, you'll know right off the bat how much you'll need to spend.

Looking for a property that you are confident will rent is easier because you've spoken with enough guests over the years to become familiar with the kind of properties renters are most attracted to. Having all of this expertise under your belt certainly makes it an easier transition into the next property.

Buying elsewhere. While all of these reasons seem to be convincing for purchasing in an area where you currently own, let's explore the advantages of purchasing somewhere else. One advantage is not having all of your eggs in one basket. If there is anything that dramatically or rapidly affects the market conditions, your risk exposure will probably be limited to one property. For example, say you have a property on Florida's Gulf Coast and a property at a ski area in Vermont. When a devastating hurricane hits Florida, you'll only have one property impacted, not two.

Having properties in two entirely different areas could also be attractive from your personal use perspective. For example, I own condos on the beach and cabins in the mountains. It's nice to have both. While the beach is a place that I usually stay for a week at a time, I often use my cabins for weekend trips.

While you would think that there's little advertising or marketing advantages, surprisingly, I have had renters who have rented both my beach and mountain properties.

Financing another vacation home

After you decide where to buy, the next thing you'll have to think about is how you will pay for another property.  Buy the second vacation home outright. While you think that you might not be able to qualify for another mortgage there is a distinct possibility that you could. Here's how. If you have been renting out your vacation home on a positive cash flow basis and claiming all of the income on your income taxes for at least two years, then the rental income will offset the expenses. To further explain, to the mortgage company, as long as you show your property as either a break even or an income asset then the expenses associated with your first property are negated by the income that it produces.

Leverage. A second option you would have is commonly referred to as leveraging. To leverage is to use your existing property's equity in a way that you can increase the profits in a manner that would ultimately give you greater return than if you just owned one property.

There are two ways that you can leverage your existing property. The first way would be to borrow money against the equity in order to purchase or use as a down payment for your second property. You could borrow it in the form of a second mortgage, a home equity line, a cash-out refinance, or even a reverse mortgage. The goal would be to purchase another property that will make more money in appreciation and income.

The second way you can leverage is by selling your existing vacation home and buying two. While this sometimes complicates the process because you';ll have two new properties to get up and running for rentals, sometimes it's the best option, especially when your existing property has appreciated a great deal. The best way to avoid capital gains when you are selling an investment that has appreciated is to do a 1031 Exchange.

What is a 1031 Exchange? Before 1979, it was complicated to buy and sell properties in a way that deferred paying capital gains tax. That year, the Starker decision in the US 9th Circuit Court of Appeals changed the rules and made it possible for investors to have more time to find a desirable property after selling one. The transaction, properly executed, would qualify for tax-deferred status. Treasury Regulations passed in 1991 validated and simplified this process. As a result, the Internal Revenue Code Section 1031 (commonly referred to by property owners as a 1031 exchange) states: “No gain or loss shall be recognized if property held for productive use in a trade or business or for investment purposes is exchanged solely for property of a like-kind.”

For real estate investors in particular, the 1031 exchange code allows them latitude in their choice of investments. The rules for 1031 exchanges require that a replacement property be identified within 45 days of the sale of the first property to realize the tax-deferred benefits.

Your real estate agent and/or tax advisor will give you full details on how 1031 exchanges can work to your benefit as a vacation home investor. You can also go to www.starker.com. With the funds you thought you'd have to pay in taxes, you can invest in your next property or even two!

Why would you choose to buy or not to buy another vacation rental home?

Buying a Condo as a Vacation Rental Home The reasons for and against buying a vacation rental condo instead of a single family home.   Common Mistakes Vacation Rental Owners Make When Buying a Second Vacation Rental Three common mistakes.   Christine on the Benefits of Real Estate Investing Real estate very rarely loses in the long term.   Figuring the Break-Even Point for Your Vacation Rental Home Determine if your income will meet your yearly expenses.

© Copyright, Christine Karpinski, 2007, u.081202.af