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Evaluate your lifestyle and needs before buying a vacation or rental home.

One out of three homes sold in 2007 was a vacation home or investment property, showing that demand for second homes remains healthy despite a slow housing market. Reasons for buying a second home vary, from recreation and vacation enjoyment to investment and development to retirement planning.

With homebuyers enjoying an advantage in many markets, now may be the time to buy that second home. Whether you're dreaming of paradise or profit, follow these five steps for a smart investment:

• Step 1: Decide if it's the right time to buy
• Step 2: Know what to look for in a second home
• Step 3: Explore financing options and negotiate with the seller
• Step 4: Learn the tax ins and outs
• Step 5: Research alternative ownership options

SECOND HOME FACTOIDS:
Median age of buyer: 46 (baby boomers own 57 percent of all second homes)
Median household income: $99,100
Median price of second home/nonprimary residence: $211,000
No. 1 reason for buying: Family retreat
No. 2 reason: Future primary residence
No. 1 location to buy: The South
No. 2 location: The West
Most popular type: detached single-family homes, followed by townhomes and condominiums
Most popular area: suburbs, followed by small towns, urban areas, resort and vacation areas

Source: National Association of Realtors