The dream of home ownership doesn’t stop with your primary residence; many Canadians dream of owning a recreational property as a personal retreat from the rigors of everyday life, one that can turn into a sound investment down the road. But using a recreational property as a means of investment brings some challenges that buying another type of property may not encounter.
First of all, let’s talk about the fact that for most buyers, buying a vacation home isn’t just about it being a good investment. Most people who are looking into buying a cottage are doing so because they think it’s a good place for the family – both immediate and, possibly, extended – to gather and create memories, not to mention a getaway for themselves when they could benefit from a change of scenery and head to a location that they love. Whether this means buying a lakeside cottage or a beach condo in a tropical locale or a pied-à-terre in a distant land, it definitely has different implications than buying an income property similar to your primary residence.
Emotions aside, an investment property should be all about your bottom line. If an investment property doesn’t cash flow, meaning that if you’re spending more money on a property that you’re getting from a property, then it’s not a sound investment. When buying a recreational property, however, it’s almost always an emotional purchase and it’s hard to put a price on that. Here are some special considerations that you need to think about when buying a recreational property as an investment.
If you are planning on renting our your recreational property, there are factors to consider that will make a difference to your bottom line, and one of the most important of those is access. For a cabin or cottage, this could mean whether or not it’s accessible year-round. If it’s not winterized or if the roads are closed to the property for a significant portion of the year, then it creates a natural limitation when it comes to how often it can be rented out, which affects how much money you can make on the property. Something else to think about in terms of accessibility is how easy it is to get to in general. If it’s a six-hour drive away from a sizeable town, then you’re limiting your renter pool, especially if it’s only available for part of the year. On the other hand, if it’s in a popular destination and/or is a short trip away from an airport, then those will be seen as benefits.
You’ll also have to consider whether or not you’ll need a property manager. Being a property manager isn’t limited to recreational properties, but it’s important because recreational properties can be vacant for significant periods of time, and a property manager may be tasked with some of the maintenance required when the property is vacant. Another role of the property manager may be helping with finding rentals, especially when it comes to condominium-style properties and developments that cater to vacationers. A property manager might especially be needed when you live far from your recreational property and it’s much more difficult to keep on top of the market and scout potential rental candidates, as well as keep an eye on the property as renters come and go. There are alternatives to using a property manager to find renters, though. A RE/MAX 2016 Recreational Property Report highlights a survey that found nearly 60 per cent of Canadians who agreed that “due to the emergence of popular, user-driven vacation rental websites, it is easier for an owner to rent out an investment property today versus five years ago.” Finding renters will save you from paying property managers, but they have the potential to get you more money than you would have if you were unable to find renters on your own or if you had a maintenance issue and didn’t catch it until there was already a lot of damage done.
And, of course, there’s there are the tax implications of renting out your property. You have to report any rental income to the CRA.
Maintenance for any type of property is always a consideration – for example: how old a property is has bearings on the cost of maintaining its heating and cooling systems; the size of the lot affects the cost of maintenance when it comes to landscaping; even owning a property in a flood zone is relevant since it can affect the cost of home insurance. When it comes to a recreation property, there are additional issues that may arise. If you’re near a beach, for example, dealing with the salt the air can make an impact on both the exterior and interior of the property, causing more constant upkeep and deterioration of materials faster than they would if in another locale. If your recreational property is in an area that gets a lot of snow, you’ll have to think about the maintenance prep required before the winter descends as well as whether or not you’ll need to pitch in for clearing access to the property. Even if your property isn’t winterized, there may be other properties that share a road and its cost of maintenance. Depending on how rural your property is, you may have to include the cost of septic tank maintenance. The more maintenance a property requires, the more it will eat into your profits.
If you need a mortgage in order to finance your recreational property, you have to have a minimum of 20 per cent upfront for a down payment. In order to get together this cash, many investors who own a primary residence refinance their existing mortgage and take equity out of their property. You can take out up to 80 per cent of the equity you have in your home, and depending on the amount of equity you have and the amount of the recreational property in question, then this alone could reach the required 20 per cent. But in some cases, the lender will require more than 20 per cent down, especially if it’s a non-traditional home. Structures like rustic cabins, those with limited access, or those that are only habitable for part of the year may require an even bigger down payment.
If you can’t get a conventional mortgage to finance your recreational property, then private lending
is always an option. Know, however, that doing so will usually mean that you’ll be paying a higher interest rate. And with private lending, the type of property also makes a big difference as to the terms of the loan and whether or not you’ll be approved, since private loans are uninsured, and the lender must fall back on the property should a default occur.
When you own a recreational property primarily as an investment vehicle, you have to keep in mind that the markets in areas like cottage country or other vacation destinations may be vastly different than the one where you currently live. Flexibility is an important consideration when it comes to investment property. Obviously playing the long game is a better option when it comes to an investment, but if you get into financial trouble or if you find that the property isn’t cash flowing like you need it to, then you want the ability to sell the property. The recreational property market is a luxury housing market, and the buyer pool is simply smaller than it is for principal residences. If the market for recreational homes in your desired area is pretty sluggish, then you might not be able to unload it when you need to. Always use a realtor local to where you want to buy the property. Ideally you want to find a property in an area that you love as well as an area with a healthy housing market, but ultimately, it depends on your end game and your investment plan. If you’re in love with a particular area and your ultimate goal is to spend more and more time at your vacation property there as you get older, then the investment portion of it is just icing on the cake. If, however, you want to buy a recreational home as an investment that you can also take advantage of, then you’ll want to take all of the considerations into much greater detail and note how the situation is different from other investment properties.
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