For the purposes of this article, we’ve assumed that you are currently using your second home as a part-time residence, such as a seasonal home or vacation property. As you contemplate increasing the investment potential in your second home, you are now considering the consequences of converting your second home to a rental property.

Mortgage Considerations When Changing a Second Home to an Investment Property

You may be asking yourself, can I turn my second home into a rental property if I have a mortgage on it? The short answer is ‘yes,’ but there are several considerations. In particular, you must consider the terms of your existing mortgage before converting a second home to a rental property.

Most second home mortgages have more favorable terms than loans for an investment property. Lenders usually require lower down payments and offer interest rates lower than they would for an investment property. It’s against the law (i.e. mortgage fraud) to make your property look like a second home when you intend to use it as an investment property. As such, misrepresenting the home’s use has legal and financial implications. 

Lenders, however, can’t do much about a legitimate change in occupancy during the term of your mortgage. Just be aware that a change in your home’s occupancy status within the first 12 months of ownership may invite greater scrutiny from your mortgage provider. Further, when your mortgage comes up for renewal, your mortgage provider may choose not to renew your mortgage at all given the change in use designation and increased risk profile. Alternatively, if you refinance later down the road, you must also disclose the change in occupancy and secure an investment property loan versus a second home mortgage which may have different terms.

By default, if your second home is within 50 miles of your primary residence, most lenders in the United States will consider it an investment property since it’s too close to your property to consider it a ‘second home.’ You may have already run into this when you purchased your second home initially. In Canada, while there is no similar distance requirement, lenders will also take into account the distance of your second home from your primary residence for the purposes of determining the property’s intended use. 

At the end of the day, lenders have a vested interest in determining if the home will be a part-time residence for you or an income-producing property given the different risk profiles.

Tax Considerations When Changing a Second Home to an Investment Property

The summary provided below is for informational purposes only. Please consult with a qualified tax professional to understand your individual tax situation.

In the United States, homeowners must report all income earned on a property that they rent out for 15 days or longer. For example, if you rent out your home for two weeks (or 14 days) a year, you don’t have to report the income earned, but if you rent it out for 21 days, you’d report it. 

The good news is you can make several deductions running an investment property. The IRS considers it a business and allows you to take business deductions. Some common deductions include:

• Mortgage interest
• Cost of maintaining the property
• Property taxes
• Home insurance
• Utility costs
• Advertising
• Commuting costs if you visit the property for business purposes
• Cost of keeping an office to maintain your rental property

There are tax benefits to consider when selling the property too. In the US, by living in the investment property as a principal residence for at least 2 of the last 5 years (it doesn’t have to be consecutive), you may be able to take advantage of the capital gains exclusion normally available on the sale of a primary residence. When you sell your primary residence, you can exclude up to $250,000 in profits ($500,000 if married filing jointly), keeping in mind that these exclusion amounts are reduced on a pro rata basis to reflect the period of rental, vacation home or other ‘non-qualifying use.’ For a second home or investment property, on the other hand, there are no such exclusions on capital gains realized from a sale. 

Like in the US, Canadians are required to report any income derived from a rental property. If you own and operate a short-term vacation rental property, an important threshold to also keep in mind is the annual revenue limit of C$30,000. If you exceed that limit over four consecutive quarters, you will be required to charge and remit GST/HST on any rental income. Note, however, that you can make deductions (similar to the above list) to reduce your tax liability.

In Canada, changing a home from a secondary residence to an investment property may create a deemed disposition for fair market value in the eyes of the CRA. In other words, they may treat it as if you actually sold the property at the current value and re-acquired the property for the same price. If there are capital gains on the transaction, you must report them. Similarly, when you actually sell your investment property, you will also need to report any capital gain (since the deemed disposition). The CRA determines your capital gain by using the property’s adjusted cost base (original purchase price and eligible costs) and fair market value when you sell. The difference is your profit for tax purposes and one-half of the capital gain is included in your taxable income. This differs from the treatment of any gain realized when you sell your primary residence, which is tax-free in Canada. Lastly, if you’re a GST/HST registrant operating a short-term rental property, you are required to collect GST/HST on the sale of your property.

A quick note on claiming depreciation as an expense: In both the United States and Canada, you may be permitted to reduce your rental income by claiming a depreciation expense (or a capital cost allowance in Canada) over the useful life of the rental property. By doing so, however, you may be subject to a recapture payment so be sure to obtain appropriate advice before doing so.   

As you can see, the tax consequences of changing a second home to an investment property are complex and require the assistance of a qualified tax professional.

Other Considerations When Changing a Second Home to an Investment Property

While the mortgage and tax consequences are the largest consideration, you should also consider the following before converting a second home to a rental property:

• Insurance. You must update your insurance from a primary/secondary home to an investment property. The insurance premiums will generally be higher because of the increased risk of having someone else use the property versus yourself.
• Building codes. Is your rental property up to code? Mostly, these codes include specified minimum standards for the interior and the exterior of the building. As a landlord, you are liable for any code violations. 
• By-laws and zoning restrictions. If you own a condominium or other property governed by a homeowners’ association, strata corporation or similar entity, be sure to review the governing documents to understand whether rentals are permitted. There may also be local restrictions on rental properties in certain cities. For instance, many cities in the United States and Canada have short term rental restrictions in place to reduce problems associated with noise, parking, partying and trash. In the United States, this includes cities in California, Colorado and New York and in Canada this includes cities in British Columbia, Ontario and Quebec, among others.
• Business licenses or permits. Even if short-term rentals are permitted in your area, you may be required to obtain a business license or permit. For example, a tourist accommodation business licence is required in Whistler, BC and a short-term rental home (STRH) permit is required in certain areas of Maui, HI.

Converting Second Home to Rental Property  

As you can see, changing a second home to an investment property, or more particularly, converting a second home to a rental property, is possible, but there are several factors you must consider. Your lender, insurance provider, taxation authority and other government departments all have a vested interest in how you own and use the property.

Importantly, be sure to discuss converting your second home to an investment property with your tax advisor and attorney before making the switch.

If you’re considering converting a second home to your primary residence, be sure to explore our article on Buying a Vacation Property or “Second Home” That Will Be Your Primary Residence. 

The post Changing Second Home to Investment Property: Mortgages, Taxes and More  appeared first on Vacation Property Online.

Funny House Rules for Guests

Cleanliness

• Please remove your shoes and don’t take a better pair on your way out
• If you have a complaint about the cleanliness, I can assure you I don’t care
• Clean up after yourself. House elves don’t work here

Guest Behavior

• No parties unless I’m invited
• Don’t be rude, unless necessary
• No fussin, no cussin, no backtalkin 
• If you are nice and polite I am more likely to say yes
• Steal my heart not my phone
• What happens here stays here…including damage to my property so please be respectful
• A smoky house is an unhappy house. Keep the house happy
• No finger painting with food
• If you watch weird stuff on my complimentary Netflix account I’ll know

Bathroom

• Wash. Brush. Always flush
• If you sprinkle when you tinkle be a sweetie and wipe the seatie 
• If you can’t get it with a flush, don’t be afraid to use the brush
• If your doodies be cray, please use the spray

Check-out Time

• Checkout time may be expedited at the owner’s discretion

Door Code

• Only gatekeepers (aka residents of [INSERT NAME OF HOME) may give out the door code. If you have the door code, you are now a key master: keep it secret, keep it safe.

Meals

• Dinner choices: take it or leave it
• Cookies for breakfast are acceptable

Mom’s Rules

• Nothing is really lost until mom can’t find it
• Remember mom is the boss
• Bedtime is negotiable 

Hosts With Pets

• The cat is not a musical instrument
• They live here. You don’t
• If you don’t want pet hair on your clothes, stay off the furniture
• I like my pets a lot more than I like most people
• To you they are just pets. To me they are adopted children who are short, furry and walk on four legs.

Rules For Adults

• Anyone in this house may be naked at any time with no notice
• If the butter leaves the kitchen, it may not be taken back into the kitchen

Cabin Rules

• Wear bug spray…and deodorant 
• Make memories and smores

Beach House Rules

• Let your cares drift away
• Seas every opportunity
• Adapt to changing tides
• Surf life’s rough waves
• Harbor strength and persevere 
• Don’t be shellfish
• Bet on a shore thing

We Hope you’ve Enjoyed our Funny House Rules for Guests

For those of you who are of a more serious disposition, be sure to check out our (less funny) vacation home rules for guests. 

The post Funny House Rules for Guests – The Best and Funniest! appeared first on Vacation Property Online.

For the purposes of this article, we have assumed that you are considering buying a resort property comprised of buildings and facilities located together that provide lodging, entertainment and other amenities for visitors. With this in mind, let’s weigh the pros and cons of purchasing one.

Being Your Own Boss

One of the most valued aspects of buying a resort property is being your own boss. As the owner of the property, you set the rules and hire the workers. You are in charge, which allows for more freedom than you typically have as an employee.

Being your own boss can help push you to perform to the best of your ability. It also allows you to set your own salary and gives you permission to do basically anything. However, there is also a drawback to being your own boss: the stress of running your own business. If you are the sole person in charge of your resort property, you will have a lot of details to keep organized. Hiring other workers, maintaining a proper budget, and keeping everything in order and running correctly will certainly lead to more stress than you might be used to.

Income Potential

Having greater income potential is almost always a good thing. In particular, increased income gives you the ability to hire others to take care of some of the aforementioned stressors. Overall, as your business grows you will be able to hire more people to take care of tasks that you might have otherwise performed on your own.

While buying a campground or other resort property will cost you money in the beginning, the pay-off can be quite lucrative. As you learn the ropes, you will be able to make improvements with a view to increasing revenue. As revenue increases so too will your income.

Access to the Landscape and Facilities

If you own an RV park or other resort property, you will have access to the surrounding landscape. This may include lakes, rivers, and hiking trails. Experiencing your resort’s beautiful surroundings will no doubt bring you great joy and inspiration. Even if the resort property is not particularly scenic, you will have the ability to create your own piece of paradise.

If you are an active person or otherwise enjoy resort-style amenities, buying a hotel or other resort property will give you the opportunity to utilize the facilities. Swimming pools, tennis courts, and other sporting areas that are otherwise difficult to access are now in your backyard. Rather than paying hundreds, if not thousands, of dollars a year to be granted access to these types of facilities, people will now be paying you to utilize these areas. 

Social Benefits

Buying a bed and breakfast or other resort property will not only give you a wonderful location at which to host friends and family but also provide a reason for doing so. Whether its conversations over a morning coffee or campfire sign-along, social interaction is never far away. Not to mention, owning a resort is a great conversation starter!

Hard Work

If buying a resort property seems like it will be an easy venture, you might want to think again. While there are many benefits to owning a resort property, there are certain drawbacks that you will want to consider as well.

For instance, if you dream of earning a truly passive income then buying a resort property may not be for you. Owning a resort property is active work, literally as well as figuratively. It can be grueling at times and enjoyable at others. Be sure that you are prepared to play an active role in the management of the resort before jumping into buying a resort property.

A Seasonal Job

Very few locations are perfect for vacationing year-round. Because of this, almost all resorts are seasonal. In turn, this makes your job seasonal. Once your resort has been established for a few years, it may make enough money for the seasonality of the job to not be an issue. However, for newly established resorts or those with prolonged slow seasons, you may need to have a second job or otherwise preserve cash in the slow season.

Economic Dependability

The reality is that you will be solely dependent upon the success of the resort and the travel industry in general. Largely, the travel industry depends upon the economy. When vacationing families are doing well economically, they will visit your resort often. However, when the economy is in a downturn, you will almost certainly experience a loss of visitors and therefore a loss of income. Similarly, worldwide pandemics such as COVID-19 can put an abrupt halt to travel.

While this can be expected, it is difficult to predict. Be sure to maintain adequate savings in order to keep your resort running throughout economic downturns or other adverse events.

Unpredictable Weather

A drought, prolonged rainy season or other irregular weather occurrence can impact the number of visitors. Even during the mild season in your area, there can be unpredictable weather occurrences. Storms and other undesirable weather conditions can cause guests to cancel their visit (or not schedule one in the first place).

Even worse, natural disasters can cause damage to your resort property. This can result in a need to shut down the resort for an unknown period of time, resulting in loss of income from lack of guests as well as repair costs.

Repairs and Maintenance

Last but not least, when thinking about buying a resort property you will need to consider the burden of repairs and maintenance. A 30 unit hotel with a pool will have much different maintenance requirements than a small bed a breakfast. Similarly, a small campground will have much different requirements than a waterfront fishing lodge. 

Importantly, before you buy the property understand the scope of repairs and maintenance. If specialists will be required, or the scope of the work requires more than one person, then you will be dependent upon qualified staff. If, on the other hand, you can handle the repairs yourself then you will need to be prepared to do the necessary work annually.

Ready to Buy a Resort Property?

Now that you have taken these pros and cons into consideration, you are ready to buy a resort property! Well not quite. Be sure to conduct proper due diligence on the resort property, including a careful review of the financial records. Hire properly qualified advisors to assist with the purchase, including legal and accounting. If you need financing, talk to your bank early in the process and be prepared to submit a detailed business plan.

After completing necessary due diligence, getting input from your advisors and considering the above, you can confidently purchase a resort property and feel good about your decision.

Visit our website again soon for more tips and resources on buying, selling and owning a vacation property.

The post Buying a Resort Property: Pros and Cons of Owning a Hotel, Campground or Similar Property appeared first on Vacation Property Online.

Included in this article are template house rules for vacation homes (in both long form and short form) that are perfect for the family cabin, beach house or other vacation property, including vacation rental. Certain vacation home rules will depend upon the property type. For this reason, the rules are meant as guidelines only and can be tailored to your specific circumstances. Further, where specific rules apply to vacation rental properties, those items appear in [square brackets]. If you’re also looking for a short term rental agreement, you can access our template here.

For those of you with a sense of humor, be sure to also check out our funny house rules for guests.

Curios to know what your vacation rental property may be worth at the end of your mortgage period? Try our Airbnb ROI calculator. 

Keys to Successful Implementation of House Rules for Vacation Homes

As you prepare your own vacation home rules for guests, consider the following guidelines:

• Everyone should read (and agree to) the rules in advance of their stay
• Don’t overdo it otherwise it may take away from the enjoyment of your vacation home
• Be sure to deal with violations fairly. For vacation rentals, the rules need to be strictly enforced whereas the rules for a family cabin can be more flexible
• For vacation rentals, be sure to collect a damage deposit in advance otherwise it may be difficult to collect
• For family vacation properties, seek input from other family members before finalizing the house rules so that everyone feels more involved. Depending upon the ownership structure, you may also want to enter into an ownership agreement establishing clearly defined roles and responsibilities and dispute resolution provisions.
• Ensure your insurance policy is up to date in case damage to your home does occur
• Review the house rules annually

VACATION HOME RULES FOR GUESTS (LONG FORM)

Dear guests,

Hello and welcome! We’re so happy to host you.

Before you settle in and get comfortable, we would like to bring to your attention the House Rules in place. Understanding and complying with our house rules will make for a comfortable and fun stay for everybody!

1. General Rules

• Please ensure you read and fully understand the house rules at the beginning of your stay. 
• All guests (and any visitors) must comply with all house rules.
• Please treat our house with the same respect as you would your own home.
• Be sure to maintain a good level of cleanliness throughout your stay.
• We hope you have lots of laughter and good times during your vacation! However, we’d really appreciate it if you’re mindful and keep noise to a minimum during nighttime hours.
• Have fun! This is your vacation time and we hope you get the opportunity to relax and visit the surrounding area.

2. Noise Levels

• Guests and visitors must keep noise to a minimum so as not to disturb the occupants of neighboring properties – especially during nighttime hours (e.g. 10pm – 8am), and upon arrival and departure; 
• Excessive noise is prohibited [and may result in termination of the vacation rental agreement, eviction and extra charges which may be deducted from the Security Deposit];

3. Visitors and Gatherings

• Guests are allowed a maximum of _______ visitors at any time during their stay. 
• Guests are responsible for ensuring maximum visitor numbers are not exceeded and that visitors comply with these house rules.
• Any additional overnight visitors must be approved in advance [and are subject to an additional fee as noted in the price].
• Parties and large gatherings are strictly prohibited. 

4. Parking

• Parking arrangements are as follows: 
  •  ____________________________________________________________
  •  ____________________________________________________________
  •  ____________________________________________________________

5. Garbage and Recycling 

• Guests and their visitors are to dispose of garbage and recycling in the allocated trash cans and recycling bins.
• Garbage and recycling arrangements are as follows: 
  • ____________________________________________________________
  • ____________________________________________________________
  • ____________________________________________________________

6. Security

• Any time guests leave the house it is their responsibility to ensure all windows and doors are properly shut and locked to maintain security and prevent weather damage. 
• Guests should turn off lights, air conditioning, fans, electronics such as televisions when not in use to promote energy saving.  

7. Outside Facilities

• Guests are responsible for the safety and security of their children at all times, as well as any disturbance caused to other residents in the neighborhood.
• Guests must supervise children at all times when using the deck area and other outside facilities. 
• Specific deck rules are as follows: 
  • ____________________________________________________________
  • ____________________________________________________________
  • ____________________________________________________________
• Specific barbecue rules are as follows:
  • ____________________________________________________________
  • ____________________________________________________________
  • ____________________________________________________________
• The hot tub/ swimming pool is only to be used between the hours of ____________ am and ____________ pm. 
• For safety reasons, it is not permitted to use any glassware in or around the pool area. [Failure to comply with this rule will result in a fine deducted from the security deposit].
• While we know there is some really cute wildlife nearby, please don’t give them any food! Its important not to disrupt the local ecosystem. 

8. Smoking and Illegal Substances

• Smoking is not permitted inside the house. 
• No illegal substances

9. Pets

• Specific rules regarding pets are as follows: 
  • ____________________________________________________________
  • ____________________________________________________________
  • ____________________________________________________________

10. Damages

• All damages must be reported as soon as reasonably practicable. [Failure to report them will likely result in a penalty deduction from the security deposit].
• No furniture or small appliances are to be moved from one room to another.
• No bathroom towels are to be removed from the property (i.e. for beach use). Separate beach towels are provided for this purpose. 

11. Checkout

• Rules for checkout are as follows: 
  • Key handover: ____________________________________________
  • Cleaning: ________________________________________________
  • Garbage: ________________________________________________
  • Security: _________________________________________________

12. Emergency Contact Details

• In the event of an emergency relating to the vacation house, your emergency contact is: 
  • ____________________________________________________________

13. Compliance

For the safety and enjoyment of all guests, it is of utmost importance to comply with the house rules. [Breach of any of these rules is a breach of the terms and conditions of occupancy as per the rental agreement. We reserve the right to terminate permission to occupy and to evict any guests or visitors who refuse to follow these house rules or who cause a nuisance to neighbors or other residents of the community].

VACATION HOME RULES FOR GUESTS (SHORT FORM)

• All guests (and any visitors) must comply with all house rules.
• Maintain a good level of cleanliness throughout your stay.
• Keep noise to a minimum during nighttime hours.
• No unregistered guests
• Parties and large gatherings are strictly prohibited. 
• Parking: __________________________________________________________
• Guests and their visitors are to dispose of garbage and recycling in the allocated trash cans and recycling bins.
• Ensure all windows and doors are properly shut and locked when you leave.

• Guests are responsible for the safety and security of their children at all times
• The hot tub/ swimming pool is only to be used between the hours of ____________ am and ____________ pm. 

• No smoking is permitted inside the house
• No illegal substances
• No pets are permitted

• Guests are responsible for any damage sustained to the house and its furnishings during their stay

• Checkout time is _________ am
• Emergency contact: __________________________________________________
• Most importantly have fun! 

The post House Rules for Vacation Homes – Template Vacation Home Rules For Guests appeared first on Vacation Property Online.

Vacation Home vs Investment Property: General Distinctions

Generally speaking, a vacation home is used for recreational purposes on a part-time basis by the owner. An investment property, on the other hand, is purchased with the intention of earning a return on investment, which can be in the form of rental income and/or the resale value of the property. From a tax perspective, the difference between a vacation home and investment property is a bit more nuanced. 

From a general investment perspective a vacation home is considered an investment property as it will typically appreciate in value over time and may be rented out while not in use by the owner. From a tax perspective, the Internal Revenue Service uses specific thresholds to distinguish between a vacation home that is rented out part time and an investment property. Similarly, by renting out a vacation property more than occasionally, the Canada Revenue Agency may view your property as a commercial enterprise as opposed to a primary or secondary residence. In this article, we explore each of these considerations in more detail. 

Return on Investment 

There are two principle ways to earn a return on investment following the purchase of a vacation home:

1. Increase in Resale Value

The concept here is simple. Let’s say you purchase a family cottage for $250,000 cash. You make minor improvements of $10,000 over the years and sell it five years later for $350,000 (after real estate commissions and other expenses). That represents an ROI of 35% over the five year period and a pretty healthy return! 

2. Rental Income

When we think of vacation homes, it’s hard not to see them as an investment overall, especially if rent is being collected. Even if the property is rented out for only a couple of weeks a year, income is still being earned. This differs from a primary residence. That extra money comes in handy when paying off the mortgage or other expenses associated with owning a vacation home. Total rental income will always vary according to the number of days that the property is made available for rent. Other factors such as time of the year and location, will also play a role. Overall, and done well, renting out a vacation property can help make it pay for itself.

Ownership Intent

Two scenarios are most common when it comes to investing in a vacation property, and they are specifically related to the owner’s feeling and their willingness to use the house themselves alongside the rental market or not. With the advent of short term rental platforms like Airbnb, the lines are often blurred as between using the property for personal use and for income generation purposes.

Scenario #1: Personal Use

In this scenario a buyer purchases a house in a place where they would like to spend their vacations and down time. The motivation is personal and pleasure seeking. They may use it a couple of weeks every year and the occasional weekend, and when they’re not there, they may also make it available for others to rent. From there, they make enough money to cover some of the expenses but not enough to necessarily earn a profit. In this scenario, its pleasure over profitability. 

Scenario #2: Income Generation

The second scenario involves individuals that don’t necessarily use the vacation home for themselves (or only sparingly). They buy it for the purposes of renting it out and maximizing income. It’s available all-year-round and is managed just like a business. This may involve renting it out long term to a single tenant or short term on platforms such as Airbnb and VRBO. Certain owners may opt for renting it out by season according to the customer profile. In low season, they will focus on a longer-term rental at a slightly lower rate and in the high season shorter-term rentals that pay higher rates. In any case, the motivation is the same: maximizing profitability. 

Vacation Home Tax Rules

The information in this section comparing tax rules for a vacation home vs investment property is provided for information purposes only. We strongly recommend you seek tax advice from a qualified accountant in order to better understand your individual tax situation.

United States

The IRS uses specific thresholds to distinguish between a vacation home that is rented out part time and an investment property. In particular, if you rent out your vacation property, you need to occupy it during the tax year for more than the greater of: (i) 14 days and (ii) 10% of the number of days you rent it out. By doing so, you can treat the vacation home as a secondary residence for tax purposes. Otherwise, in the eyes of the IRS it is an investment property. Also, if you use your second home as a residence and rent it for fewer than 15 days, you are similarly exempt from reporting any of the rental income. There is some overlap in the tax treatment of secondary residences and investment properties but there are also some differences. Be sure to speak with a qualified tax advisor to better understand the tax implications under either designation.

Canada

From the CRA’s perspective, renting a vacation property more than occasionally could trigger a “change in use” of that property for income tax purposes. Under such circumstances, the CRA will view your property as a commercial enterprise as opposed to a primary or secondary residence. Any such change in use will result in a deemed disposition of your vacation property at fair market value. Further, it may also necessitate becoming a GST/HST registrant.

Vacation Home vs Investment Property: So is a Vacation Home Considered Investment Property?

In summary, from a general investment perspective a vacation home is considered an investment property. It differs from a primary residence in the sense that, as its only being used part time, rental income can be generated while its not in use. Even if rental income isn’t being earned, owners can often enjoy a healthy return on investment through appreciation of the resale value. From a tax perspective, be sure to consult a qualified accountant in order to better understand the designation of your vacation home. 

 If you’re considering converting your vacation home to a rental property, be sure to explore our article on changing a second home to an investment property. 

Curious as to whether buying a vacation home is a good investment? Click here to learn more. 

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