One of the impacts of the COVID-19 pandemic has been a dramatic increase in the average sale price of cottages and vacation homes across Canada. With work-from-home the new reality for millions and international travel mostly halted, demand for domestic vacation properties has soared, pushing property prices up by as much as 40 percent.
Of course, another outcome of the pandemic has been a steep decline in the cost of borrowing money, with interest rates expected to remain at rock-bottom lows for at least another year. With mortgages more affordable and attractive to many, the appetite for property purchases has remained high, even as economic uncertainty persists elsewhere.
Many of us dream about owning a property that provides a fun, welcome escape from everyday life, a familiar place to unwind with family and friends, or simply enjoy blissful serenity and stunning natural beauty.
If you’re wondering whether now is the right time to fulfill your dream and invest in a vacation property, here are a few things you’ll want to consider.
Land is typically a great investment, but you might have to hold it for a while
Whether it’s a remote, forested spot that you dream of building a home on someday, or an existing house by the lake, there’s almost always profit to be made in buying land. Although prices aren’t likely to keep rising on the same steep trajectory the past year has seen, even modest growth will increase your overall wealth over the long term. Needless to say, waterfront property tends to hold its value better and grow in value more quickly than other types of land.
In general, the longer you hold on to a property, the better insulated you are against real estate price volatility. If you plan on owning your vacation property for 10 to 20 years or more, you’re almost certain to sell it at a profit, even when accounting for real-estate costs, commissions, and land-transfer taxes. If your time horizon is less than a decade, however, you might not be so lucky.
Don’t overlook hidden costs of ownership, and how they impact your overall finances
High purchase prices are just one of the expenses associated with owning a vacation property. Even if you score a deal on the price, there’s no escaping the reality of other ongoing costs such as property taxes, utility bills, insurance, maintenance and repair, and furniture and appliances. There may also be additional costs for cottage road maintenance, septic system maintenance, potable water, garbage collection, and snow removal.
Before you purchase a vacation home, consider the impact these additional expenses will have on your overall budget. Will you still be able to contribute as much to retirement savings, your Tax-Free Savings Account, or your children’s education fund? Do you still have enough available cash to handle an increase in mortgage interest rates, or to cover a costly expense at home (i.e., emergency roof repairs or a new car)? Make sure paying for your vacation home, and all its associated costs, doesn’t leave you cutting corners elsewhere.
Don’t rely on rental income, consider it a bonus
If you’re hoping to earn income by purchasing a vacation property and renting it out, there’s every reason to believe demand will remain strong. Still, you don’t want to base the financial plan for your vacation home purchase on the income you expect to earn from rentals – the pandemic has proven there are unforeseen situations that could curb or eliminate that income, just as changes to local zoning bylaws or municipal rental restrictions might also do.
Assuming you can carry a vacation home without earning a penny of rental income, whatever cash you do bring in should be seen as a bonus. You can use it to pay down the mortgage, cover the cost of repairs and upgrades, or foot the bill for property tax and utilities. Also, bear in mind that rental income must be declared to the CRA and could impact your overall tax bill by pushing you into a higher tax bracket.
Finally, remember that renting comes with its own set of costs. You’ll need to devote time to advertising and promoting your place, keeping it clean, tidy, stocked, and maintained, and handling any other issues that crop up, including complaints from tenants and neighbours. Some of these duties can be handled by a property manager, but the percentage they charge for convenience will eat into your rental profits.