7 Things to Consider Before Purchasing a Vacation Property
For many Canadians the perfect retirement includes owning a vacation property. For some the decision to buy turns out to be a dream come true but for others it can be an expensive nightmare. Here are some things to consider before making the emotional decision to buy a vacation property.
Why do you want it?
Possibly owning a vacation property will allow you to spend more time at a destination you love, it will become a place where you can take your family and friends or you feel it will be a great investment. Whatever the reason, it is important to understand what your motivation is and then evaluate if that’s realistic and reasonable given your current situation.
Can you afford it?
Depending on whether you are looking for a large detached house exclusively for personal use or a small condo to rent out and use once in a while, the purchase price and the cost of ownership will be dramatically different and most likely more than you expected.
The costs of ownership may include mortgage payments, taxes, insurance, strata fees, utilities, property management fees, resort association fees, furnishings, as well as repair and cleaning costs. Other factors to consider is the size of the contingency reserve fund if part of a strata and any future plans to renovate or replace furniture. If the property is located in another country then the exchange rate will be an important consideration for both expenses and rental revenue. Also, some properties are difficult or impossible to get financing on or require higher interest mortgages.
How much will you actually use it?
It is important to ask yourself realistically how often you will be able to use the property. Is the property located somewhere you can easily drive to for the weekend or does it involve flying to another country? Your children may to want spend their weekends with mom and dad away from their friends now but will they when they become teenagers? Is the property located where it can be used year round or just for a few months each year?
Who will look after your property when you are not using it? Your property could become damaged due to severe weather or broken into by criminals looking to steal valuable items.
Will it be exclusively for personal use or will you rent it out?
If planning to rent it out, first you will need to know what the rental bylaws are for the property or location you are interested in. Some properties are required to be made available for nightly rentals and therefore there are restrictions on long term rentals and owner usage.
If you plan to rent it out part of the time to help cover costs then you will need to decide whether you will do it yourself or higher a management company. If you choose to do it yourself then you will be responsible for marketing the property, collecting the damage deposit, providing access to renters, and having the property inspected and cleaned after. You may also be required to collect and remit lodging taxes. Alternatively, if you use a management company they will do everything for you but they will charge a significant percentage of the rental revenue, often in the range of 30 to 50 percent.
Full or partial ownership?
One way to reduce the cost of the purchase and ownership is by sharing it. This may be done by going in with family members or close friends or else by only purchasing a fractional share such as one quarter or one tenth.
If purchasing with family or friends the rules will need to be clearly laid out as to how and when each party gets to use the property. For example, will it be used at the same time or during separate times and what happens if someone wants out of the partnership?
If buying a fractional ownership one must consider desired usage vs. rental opportunity. Most renters will want weekends which may also be when you would like to use the property.
It is important to know the tax laws for the country where the property is located. For example, in the U.S. there is estate tax of 18% or more depending on the value of the property which applies to Canadians owning property there.
In Canada, a net rental loss can be deducted from other income so it is an important consideration who’s name the property is registered in. If the property is cash flow positive then it may be better to have the lower income spouse own the property, if negative then the higher income spouse may want to own it. Alternatively joint ownership or having the property owned by a corporation may be most beneficial depending on your personal situation. Definitely consult with your accountant in this regard prior to purchasing the property.
Rental income and resale value may vary dramatically depending on the location of the property. Vacationers are usually willing to pay a premium for beachfront, ski-in ski-out or properties located on the golf course compared to those locations requiring a walk or drive to the beach, slopes or course. Views and proximity to services such as restaurants and shops are also important factors.
It is important to do your homework in order to learn about the area, the neighbourhood and the complex you will be buying into. An experienced realtor familiar with the area and vacation properties will be a valuable asset.
The decision to buy a vacation property has a high degree of emotion inherent in it, higher than with a regular rental property where it’s more about the numbers. It would be unwise to buy on impulse during your first trip to your new favourite holiday destination. Renting a few times, in different locations, can teach you a lot about what you want and need from your dream vacation property.