TALK ABOUT THE

Recently, he made an offer on a vine-covered stone house in California's wine country. It's just down the road in tony Yountville from the hot restaurant French Laundry, and Thompson, a divorced dad from Orinda, Calif., has it all worked out in his head. Once a week he'll head out to the house with clients or his two grown daughters, and together they'll decompress in Napa Valley. "It's a nice little getaway," he says. "I just said to myself, 'What the hell?'"

Weekend homes used to be, well, a luxury. But these days, thanks to everything from those historically low interest rates to a whole new mentality about taking vacations, they're becoming the latest status symbol for middle-class America. According to the National Association of Realtors, last year set an all-time record for second-home sales, hitting 445,000, or about 5 to 6% of all home sales. Prices were all over the place, from grand multimillion-dollar beach houses in East Hampton to $200,000 cabins in the Wisconsin forests. And so far, the market has remained strong even with rates nudging up a bit, turning a host of towns you may not have heard of (Alta, Utah? Crested Butte, Colo.?) into hot spots in their own right.

Brokers say this is only the beginning of the second-home march, and to be sure, the demographics are on their side. The nation, as everyone knows, is getting older, and that means the largest pool of second-home buyers retireesis only getting bigger. In the year 2011 almost 4 million Americans are expected to turn 65, a 73% increase over the number who reached that birthday in 2001, according to U.S. Census data. Christopher Cain, author of Road Map to Your Vacation Property Dream, says this group is already driving beachfront property through the roof because many aren't waiting for retirement. "Every year it's a relentless wave of baby boomers entering the second-home market," he says. "And it's just going to continue."

What's more, vacation homes are to some extent in limited supply; usually, they're situated amid beachfront towns or mountain resorts, and places like these can handle only so much expansion. "God's not creating many more scenic vistas," says Walter Molony, a spokesperson for the National Association of Realtors. The bottom line: Even with prices high, now may be a good time to move into double-home ownership before it's too late.

But how do you get into this market, and what's the best way to buy? As with any real estate purchase, a vacation home can be a fount of not-so-fond memories, including property taxes, insurance, maintenance costs and property-management fees. Renting it out? Additional problems of upkeep, income reporting and finding tenants come into play. Indeed, unlike with your primary home, you have many options when you buy a second home which we've condensed into four. Follow along closely and who knows maybe you'll find yourself sitting as pretty as Clark Thompson. "Most people say it's the best thing they ever did," he says.

Option One
Buy It, Use It Yourself
Naturally, the best option for a vacation home is to buy it and just use it yourself. In fact, according to an NAR survey, 71% of all second-home owners don't rent out at all. Sure, you have no rental income to help with the mortgage, but you also have none of the worries and hassle of dealing with tenants and extra taxes. And of course, there's the best reason of all: You and your family get to be at the house whenever you want, for as long as you want.

"I bought it primarily for myself and my family," says Dan Peterson, the 49-year-old president of an employee-benefits consulting firm, about his three-bedroom townhouse villa in the Florida Keys. His daughter, he says, just graduated from Duke University, and Peterson is expecting her and his wife, Becky, to make it there most weekends. Besides, Peterson, who thought about renting, has also discovered that giving up potential rental income isn't that hard when you consider how second homes are appreciating.

Indeed, by all accounts, the vacation home market has been every bit as strong as the general housing market. Prices were up in the past year everywhere from the Hamptons (26%) to Reno, Nev. (13%), to the Cape May, N.J. area (16%). With values up, even prime-season rents can seem small-or at least they did when Peterson did the math. At best, he figures he could occasionally get $2,200 a week for a home he recently put on the market for $975,000, or 48% more than he paid for it, including $100,000 in improvements. Does he really want to expose such a valuable asset to an anonymous renter? "The idea of renting it out to an unknown, the risk is just too great," he says.

Option Two
Buy It, Rent Short Term
Okay, much as you'd love to, you just can't swing that Aspen retreat and bear the full mortgage yourself. Renting it out for short periods is an obvious solution, and here's the good news: The same forces that are escalating second-home prices i.e., an affluent and aging baby boomer population are also beginning to push up the rental rates that had fallen in the post-9/11 era. How much? About 3 to 5% nationally last year, according to EscapeHomes.com, and more in some hot spots such as Cape Cod, Nantucket and Hawaii, where even the off-season is becoming strong.

For Charlie Kesler, a healthy rental market has made all the difference in the world. The Madison, Wis., sales manager and his wife have owned a cottage near Shawano Lake for 11 years now and in the past nine years have seen the weekly rental jump 75%, from $400 a week to $700. This, for a cottage whose property taxes are only $2,100 a year. He could get more, Kesler says, but he sticks to a basic renting principle of his be picky about the tenants you choose. "We only rent to people we know," says the father of three.

So what are the issues to think about? For starters, of course, there are tax concerns, beginning with the length of the rental. According to Linda Goold, tax counsel for the NAR, Uncle Sam actually allows second-homeowners to rent out for less than two weeks without declaring any extra income. But go beyond those two weeks and you'll probably need an accountant to figure out income and deductions (skip ahead to option three for more details). Want to take the full standard mortgage-interest and property-tax deduction? Goold says you can apply it against your personal income if the rental doesn't exceed two weeks, but you have to apply a portion of it against rental income if it does.

And don't forget all the other issues that come with renting, like the added liability. Liability premiums can be "a little" higher if you have a constant stream of renters, says Jeanne Salvatore, vice president of consumer affairs for the Insurance Information Institute, but "are worth it." Her suggestion: Get covered over and above your basic policy, especially if you have a lot to lose. And consider a higher level of no-fault medical coverage too, which allows renters to deal with insurers directly instead of suing the homeowner.

Buy It, Rent Long Term

Ask Mark Robeson about his second-home strategy and he'll tell you he has it all figured out. The Walnut Creek, Calif., software salesman and his family have this great, 3,600-square-foot home in the Bahamas that overlooks a picturesque bay. The family visits the home whenever the mood strikes. But they also rent it out for 10 to 15 weeks a year, and Robeson insists there is "very little time or investment involved." Most renters, he says, come from friends of friends who've heard about the place, online listings or from a family Web site created to drive up interest. "Some of our neighbors on the bay have fears about opening their places to people they don't know," says Robeson. "But I'm glad we ventured into it."

No, renting long term is usually not this easy, nor is it the most attractive option for second-homeowners. According to the NAR survey, only 11% of vacation homeowners are taking this track, renting more than one month a year. But with home prices so high, it may simply be the only way to get into the game.

But get into it carefully if you do. While Robeson didn't have to, odds are that you will have to use a rental firm, since you probably don't live in the community and could do without the additional headaches. The firms can take care of a lot of the hassles, from paying lodging taxes to getting the right insurance, but they're not cheap. Depending on the services you need, expect to pay 15 to 45% of the income they generate, says Michael Sarka, executive director of the Vacation Rental Managers Association. "There's a lot of responsibility that comes with a second home," he says. "It's not just a matter of hanging up a sign and beating off the constant flow of people wanting to rent."

As you would expect, the tax and insurance issues only get more complicated. Again, it's all about the idea of "proportional allocation," says Goold, the tax counsel for the NAR: Whatever portion of the year you use your place as a rental, you can deduct various expenses as if it were a business; the rest of the time you take the usual mortgage-interest and property-tax deduction. Only the IRS has limits that tend to affect landlords with long-term rentals-such as generally limiting rental-related deductions to the income you bring in. "In that case, if you generate $10,000 of income and your expenses are $12,000, you can only deduct $10,000," Goold says. And if your rental cash exceeds expenses, of course, you have to declare the difference as income.

As for insurance, having a constant stream of visitors is, in most cases, going to jack up your bill. If it's just you at the place, you may actually pay 20 to 30% less than your typical primary homeowners' policy because there's nobody at the vacation home most of the time. But with renters that discount is negated, according to Chubb personal insurance marketing manager Dan McCabe. The good news is that having a property manager in the area is one way to trim that back, by around 5 to 10%.

Option Four
Buy a "Fractional Share"
Maybe the idea of being totally responsible for another home the taxes, the insurance, the worries about break-ins, and on and on isn't all that appealing to you. You'd rather arrive at a fancy five-star condo with a daily cleaning service, chocolates on the pillow and a Zagat-rated restaurant, all right next to the private pool cabanas.

Well, you can have that, too. For a price. Introducing . . . "fractional ownership," which works essentially like a timeshare but offers more time to the owner and is often run by big-name players, such as Ritz-Carlton and Disney. Indeed, players like these have energized this segment of the real estate market, with more than 3 million time-share and fractional owners across the country last year, up 9% from 2002. "We get to use it whenever we want it without the hassles of dealing with sump pumps and water heaters," says Mike O'Donnell, a Denver trial attorney and recent convert to this option.

Prices do range quite a bit. O'Donnell paid $170,000 up front for partial ownership of a three-bedroom condo in the Ritz-Carlton Club in Bachelor Gulch, Colo., which he and his family get to use 21 days a year for an additional $10,000 in annual maintenance fees. (Or he could spend that time at other club locations such as Jupiter, Fla., or St. Thomas in the Virgin Islands.) But not all properties are as pricey as O'Donnell's. A three-week yearly interval at the Marriott Grand Residence Club in Lake Tahoe, Calif., for instance, goes for around $70,000. And the industry average for time-shares is even lower: a $14,500 buy-in and a $385 maintenance fee.

To be sure, the time-share concept has historically come with bad connotations slick salespeople and high-pressure tactics, and shares that could decline in value or be difficult to resell. Indeed, few brokers track the resale values of time-shares. So some experts suggest sticking with the name brands. One bonus is that at many properties, fractional owners who can't use all of their weeks in a given year can try to earn some rental cash by putting those unused weeks in a rental pool doled out to other guests.

For O'Donnell, the fractional option is just the trick for getting into the vacation-home market. Like so many new second-homeowners, he figures he's doing more than just dealing with real estate. He's purchasing a "legacy" for the family. "Now they have a vacation for life," he says.