NEW YORK (CNN/Money) - I want to buy a home in Europe that can serve as a vacation home and rental property. I also see it as a way to diversify my portfolio and to hedge against currency risk. What are the pros and cons?

-- Sharon, Atlanta, Georgia

Ah, who among us hasn't daydreamed at one time or another about sipping café au lait on the veranda of our own little villa in the south of France? Or taking in the view from an Alpine cabin in the Austrian Alps? Or, for that matter, perhaps something closer to home, say, sunbathing on the private stretch of beach in front of your own waterfront casa on Mexico's Yucatan peninsula? And if you can justify such an idyllic vision as a wise financial move, well, so much the better.

But before you start plunking down money and signing papers, you'd better consider some of the realities involved in pulling this off -- and some of the potential pitfalls.

The first thing to remember is that buying a vacation home in a foreign country is a lot more complicated than buying in the U.S.

Unless you're paying cash (either from assets you already own or perhaps borrowing against the value of a home you already own), you'll likely be getting a mortgage from a lender in the country where you're buying. That may mean coming up with a much larger down payment than is the case in the U.S., not to mention dealing with contracts in foreign languages.

The laws concerning property rights and usage may differ from those here in the U.S.; indeed, some countries have restrictions on what types of property foreigners can and can't own.

And, of course, there's the matter of logistics. The farther you are from a property, the harder it is for you to monitor. You would likely have to hire some local person to monitor and maintain it. These issues can be overcome, but they do add to the hassle factor.

As for investment considerations, it's true that owning a vacation rental property would diversify your holdings. You're not only adding real estate to your portfolio, but real estate whose value isn't tied (directly at least) to the fortunes of the U.S. economy and financial markets.

But let's not overdo the diversification argument. We're talking about one property here, not a portfolio of different properties spread across many countries around the globe.

In the world of equities, a person who buys just one stock takes on "specific stock" risk. If the one company they've invested in runs into trouble -- the managers turn out to be crooks, new products bomb, whatever -- then boom! There goes the value of that investment even if the market overall is doing fine.

Well, in your case, you would be taking on what I would call "specific property risk." If you happen to buy a property in an area that doesn't thrive for whatever reason, then the fact that property values in other areas of the same country or elsewhere in Europe or wherever are soaring doesn't matter. All that matters is what's happening in the specific area where your property is located.

Which means you've got to do a lot of research ahead of time to be sure the future prospects for price appreciation are solid. That's difficult enough to do in the country where you reside; I'd say it's even tougher to do in a country where you're not as familiar with the economic and political trends.

As for the currency effect, yes, you could benefit from having an investment whose value is denominated in a foreign currency (assuming that currency doesn't peg its value to the U.S. dollar, as China and some other countries do).

Since January, 2003, for example, the Euro's value has risen from about $1.05 to $1.33 or so, a 27 percent rise. So a U.S. resident who bought a property denominated in Euros back in the beginning of 2003 would be sitting on a 27 percent gain just from currency appreciation (although the actual gain could be more or less, depending on how the property's value fared in Euro terms). In short, the owner would have benefited nicely from the dollar's decline.

Remember, though, currency movements can cut both ways. If the dollar climbs, you'll experience the opposite effect. Remember to that, if you financed a foreign property in foreign currency -- in this case, Euros -- then a rising Euro means your carrying costs will climb. You've got to convert more dollars to Euros to make your mortgage payments and pay for maintenance and property taxes. Before you buy, you'd better be sure your budget can handle the effect of these sorts of currency fluctuations.

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Put it all together and my view is that, for most people, owning a foreign vacation property is something to consider more for personal or lifestyle reasons than for financial reasons.

If you would really enjoy owning and living in a house outside the U.S., then fine. Go ahead and buy one. But don't muddy the waters by trying to justify the purchase on investment grounds.

Because if what you really want is an investment that can diversify your portfolio and give you a bit of a hedge against currency fluctuations, you're probably better off just buying a foreign-stock mutual fund.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."