Dreams do come true if you plan ahead.

Have you ever dreamed of owning a vacation home, at Smith Mountain Lake or any other place for that matter? You're not alone, according to statistics, more than 3 million Americans own vacation homes. And with today's low interest rates, along with a host of products and services designed for multiple home-ownership, now might be the ideal time to turn your dream into reality.

In addition to being a well-deserved place of relaxation, a vacation home can actually serve as a solid investment and eventually a permanent retirement residence. If you're considering purchasing a vacation home, you should understand the financing requirements and guidelines the mortgage industry follows regarding vacation and second homes.

The good news is that some lenders require only a 5 percent down payment on a second home, although some still require up to 30 percent of the total cost. But, financing for vacation homes that will be used as rental property costs slightly more than conventional loans typically one-eighth to three-eighths of a percent higher.

Select a prime location. Look for a property that's readily accessible by car and no more than a half-day's drive, or a short plane flight, from a large population center. Resort-like amenities whether golf, tennis, water access, or reliable snow for skiing also helps ensure a property's appeal to a wider audience. Easy walking distance to these amenities (three to seven minutes) adds value. In the end your best bet as an investor is to buy where people want to be. In a less desirable market, there's no one to bail you out."

Choose an area with growing demand. Analyze migration trends, the current and potential supply of vacation homes, past and projected price appreciation, and home sales growth to assess the area's prospects for future appreciation.

Know what you're buying. Check lot lines against the property survey, and investigate water features upstream and downstream to be sure they aren't polluted or obstructed. Watch for currents that make swimming and navigation difficult. And try to safeguard that valuable view with proximity to park land or conservation easements that restrict building.

Don't assume values will always go up. You have to think about where the market is going and what your hold strategy is. You can't just buy at any price and operate on the theory that an even bigger fool will come and buy it from you. Some people, who once owned at the beach, are now looking at mountain or lakefront properties as the next affordable frontier. Others are opting to buy land, a good strategy in more speculative markets.

There also are several tax benefits to dual homeownership. You can deduct up to $1 million of the mortgage and interest when purchasing or improving a principal residence and one other home. This may allow homeowners to fully deduct mortgage interest and property taxes on a second home. Plus, income earned on a second home that is rented for less than 15 days per year is tax-free.

If you plan to rent your vacation home, the potential income cannot be used to qualify for a mortgage loan. To qualify vacation and or second homes must be suitable for year-round occupancy, meaning the home must be weatherized and have adequate heating and cooling.

Dreams can and do come true, particularly when you adequately plan for them. Consult your tax adviser for specific details.

The majority of second-home investment buyers, about 57 percent according to the NAR survey, rent out their properties at least six months of the year. Renting a home for even a few weeks during the high season here, where low-end rentals go for $1,000 a week, can cover homeowners' dues and property taxes for the year, plus a part of the mortgage.

Buy with renting in mind. Look at the house as something to be used by someone else, not by the buyers themselves. Choose interior features and furnishings with durability in mind.

Determine a target rental audience. Based on the area's available activities, profile the most likely renters. Then make improvements to the home accordingly. Families will want play equipment. For a retiree renter, consider grab bars in baths.

Make management easy. Find a reliable home-warranty company that'll take care of interior mechanical problems when a tenant calls. Combining this service with tenants who send the rent checks directly to the owner can help save on management fees, which can be up to 35 percent of each month's rent.

Factor in taxes. Renting a home for more than 14 days a year allows owners to deduct expenses such as taxes, repairs, and depreciation for the time the property was rented. However, owners will owe taxes on rental income, and mortgage interest may not be fully deductable. Different tax treatments apply to the periods of personal use and rental. Advise clients to check with an accountant if they intend to rent their properties.

High-earning baby boomers should keep the second-home market strong for at least another decade. Echo boomers, whose telecommuting lifestyles will allow for more remote work, will also help to buoy the market by spending more time in vacation homes. As a result price appreciation may drop to single instead of double digits, but properties in moderate climates with strong amenities will continue to perform well. If your client is ready to sell, keep these tips in mind.

Consider a 1031 exchange. An exchange is a great way to take the tax bite out of high property appreciation. Since only investment properties are eligible for 1031 exchanges, second-home owners must be careful how they use the home, especially the last year before an exchange. The most conservative way to ensure that a second home will be considered an investment for exchange purposes by the Internal Revenue Service is to personally use the home for fewer than 15 days a year and make an effort to rent the home the remainder of the time. Second-home owners may also be able to use the property more than 14 days a year as long as that use is for a business purpose. Business purposes can include visiting the area to look at other potential property investments, making or supervising repairs to the home, or using it as a base for a company training session or retreat.

Convert the home to a primary residence. When a 1031 exchange isn't feasible, sellers can consider making their second home their primary home for the two years before they sell it. Even if a property was previously used as a rental, owners can then qualify for the capital-gains exclusion ($250,000 for individuals, $500,000 for married couples). As of Oct. 5, 2004, owners who acquired their second home through a 1031 exchange need to own it for five years and live in it for two of those years to receive the deduction.

More Americans are deciding that if one home is good, two must be better.

5 questions second-home buyers should ask themselves.

Before taking the plunge into second-home ownership, ask yourself these questions

1. How far are you willing to travel?
2. How much are you willing to spend?
3. Why are you buying (investment, recreation, and or retirement)?
4. What amenities are you looking for (water, mountains, golf courses, and city nightlife)?
5. How often will you use it (weekends, summers, holidays) and with whom (a partner, children, grandchildren, friends)?