As you approach retirement, you may be considering buying a retirement home early. Whether its downsizing to more modest accommodations or moving to a sunny destination, there are many reasons for buying a retirement home. Many people, however, won’t give much consideration to retirement living until their twilight years. Naturally, it’s not high on the priority list when retirement is ten years away or more. Yet, there are many reasons why buying a retirement home before you retire may be a good idea. In this article we explore the top reasons to buy a retirement home early including, you guessed it, buying a vacation home for retirement.

Buying a Retirement Home: When, Where and What to Expect

Before buying a retirement home early, consider the following:

When to Buy a Retirement Home

If you are considering buying a retirement home early, at which point should you consider doing so? In short, you should begin looking sometime before your planned retirement, whether it be 55, 65 or 70 years old. For most retirees in the United States and Canada, this will typically happen on or before the average retirement age of 66.85 years and 64.75 years, respectively. Otherwise, timing will depend on a number of factors, including your career goals, individual financial picture and family obligations.

Where to Buy a Retirement Home

What better place to start than the top retirement destinations in North America? In the United States, top retirement destinations include Florida, California, Texas, Hawaii and Colorado. In Canada, British Columbia (the Okanagan and Vancouver Island), Alberta (Canmore and Cochrane), Ontario (Niagara on the Lake, Kingston and Stratford), Quebec (Rimouski, Joliette and Quebec City) and New Brunswick (Moncton) are all popular destinations. If you are considering retiring in Canada, be sure to check out our list of the best places to buy a vacation home in Canada.

What to Expect in Retirement

Everyone will have their own unique plans for retirement, yet patterns emerge among specific generations of retirees. For instance, Millennials may be more inclined to travel during retirement whereas Baby Boomers may be looking to spend more time with family. Anticipated retirement activities will necessarily have implications on where you retire and overall retirement spending, amongst other considerations. In terms of the latter, according to a 2018 survey average annual spending by retirees was US$49,441, compared to US$65,834 spent by workers. Broken down further, on average retirees spent US$16,681 on housing, compared to US$21,339 spent by workers. The trend is clear: retirees typically spend less overall, including on housing costs. Accordingly, you can expect to spend less on retirement housing.

Top Reasons for Buying a Retirement Home Early

With these preliminary matters out of the way, here are the top reasons for buying a retirement home before you retire.

Move at Your Own Pace

By purchasing a retirement home early, you have the time and flexibility to move at your own pace.

Rather than an abrupt transition to retirement living, you could decide to slowly move into your new home. This may entail a temporary move for a portion of the year or regular weekend use until you’re ready to move permanently. Whatever the case, this will afford you the opportunity to familiarize yourself with new surroundings and ensure a more comfortable transition.

An early purchase may also allow you to make an opportunistic purchase when prices are low. At the very least, you can avoid a rushed purchase. This has the added benefit of allowing you to sell your primary residence when you’re ready. In short, you can buy and sell when it suits you and take advantage of market opportunities.

Of course, the best laid plans are subject to change. By purchasing a retirement home early you may avoid the biggest mistake of all: moving in the first place. Perhaps, after spending some time at your new home and getting to know the area you’re no longer set on retiring there. Maybe the climate isn’t to your liking or the location is too far from the grandkids. By buying a retirement home before you retire, you have the ability to change your mind.

 It’s Vacation Time: Buying a Vacation Home for Retirement

What better way to transition to retirement than by spending vacations at your new home with friends and family? This is a great way to not only get you comfortable with your new surroundings, but also your loved ones who may be more inclined to visit after having already vacationed there.

From a financial standpoint, you have the option of renting out your home part time to cover expenses in the interim. If you’re more hands off then you can use a property manager who will take a portion of the rental fees. For those that are happy managing things themselves, there are any number of vacation rental websites including Airbnb and VRBO.

Take Advantage of Maximum Borrowing Capacity While in Prime Earning Years

With interest rates being at historical lows, now may be a good time to take advantage of your maximum borrowing capacity.

By taking out a mortgage on your retirement home now, you can borrow money while still in the workforce. This money may not otherwise be available in retirement given your reduced income level. More importantly, you can borrow now and pay-off your mortgage over time (and ideally before you retire).

This also provides a secondary benefit: forced savings. Instead of succumbing to unnecessary spending, you will be forced to exercise a certain level of fiscal discipline as you service the mortgage. Such fiscal discipline can certainly pay off over time, especially for those individuals that struggle with excess spending.

While not recommended, it may also be possible to withdraw funds from your retirement account to help with the down payment (but not without penalty).

Renovate to Suit Your Tastes

Home renovations are not only costly but also disruptive to your living conditions. For this reason, buying a retirement home early may be attractive in that it will allow you to renovate while living in the comfort of your primary residence. This is especially beneficial for larger renovation projects. Instead of living without a kitchen or bathroom for an extended period, you can live as you normally would while your contractor completes the necessary work.

By purchasing a fixer upper that requires substantial renovation, you can also save money. Instead of paying top dollar for a recently renovated home, you can potentially save tens of thousands of dollars by purchasing an older home. You then have the ability to pick and choose which renovation projects to complete and properly manage costs. To the extent there are cost overruns, its also important to have a financial safety net. By undertaking a renovation project while still in the workforce, you can at least take comfort in knowing you have another paycheck coming.

Understand Your Expenses

Admittedly there is a certain amount of guess work involved when determining how much money to save for retirement to cover necessary living expenses. What better way to understand your living expenses than owning a retirement home early? From how much it costs to maintain the house annually to how much groceries cost in the area, you will have valuable insight into your living expenses well before retirement. For instance, perhaps after owning the home for several years you realize that there are various maintenance expenses that you had not anticipated. Armed with this new information, you can adjust your retirement plan appropriately. Without this insight, it’s a bit of a guessing game.

Other Things to Consider Before Buying a Retirement Home Early

If you’re considering buying a retirement home before you retire, keep in mind the following:

• Obtain financial advice. Be sure to talk to your financial adviser to ensure that you can handle the extra financial strain. For instance, will you need to work longer in order to service another mortgage? If so, perhaps buying a retirement home early is not for you.
• Implications on asset mix. Consider the implications on your overall investment portfolio/asset mix. Owning a substantial amount of real estate may be risky depending upon how well diversified you are in other asset classes.
• Owning multiple properties. Be prepared to deal with the usual stresses of home ownership, including unexpected repairs and maintenance. If you will be renting out the property part time, who will manage the property? If you will be managing it yourself, are you prepared to deal with such a responsibility as you approach retirement?
• Changing preferences. Tastes and preferences may change over time so don’t expect everything to go according to plan. The further away from retirement you purchase your retirement home, the greater the risk is that your tastes will change.

To better understand the implications of converting a second home to a primary residence, be sure to explore our article on Buying a Second Home That Will Be Your Primary Residence.

The post Buying a Retirement Home Early: Your Chance to Own a Vacation Home? 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.

 General Requirements

While certain lenders may require a down payment of only 5% for a primary residence, many lenders in the United States and Canada will require a down payment of at least 20% for a second home. This is because second homes are inherently more risky as borrowers are more likely to default on repaying the mortgage on their second home. After all, borrowers faced with financial hardship will typically prioritize repayment of a mortgage on their primary residence as they need a place to live.

Using 20% as an example, if you’ve managed to save up $50,000, then the maximum vacation home you can afford is $250,000 ($50,000 / 20%) regardless of your overall financial picture. If you’ve managed to save up $100,000, then you can afford a vacation home with a purchase price of up to $500,000.

Yet these are just general rules of thumb and, depending upon the use of the property, there may be certain lenders willing to accept a more modest down payment. In order to provide more specific information, we have included more detailed guidelines for borrowers in the United States and Canada below.

United States Requirements

The size of your down payment will depend, in part, on the type of mortgage you choose. Each mortgage type will have its own guidelines and eligibility criteria to consider. Briefly, the following types of mortgages may be available to you:

• Veterans Affairs (VA) loans – VA direct and VA-backed Veterans home loans are only available to Veterans, service members, and their survivors, typically with no down payment.
• Federal Housing Administration (FHA) Loans – FHA loans are another government sponsored loan program that has been around since 1934, characterized by low down payments (as low as 3.5%), low closing costs and easy credit qualifying. FHA loans, however, are only available for primary residences.
• Conventional Loans – unlike VA and FHA loans, conventional loans are not guaranteed  or insured by a government agency. For conventional loans (and FHA loans), mortgage insurance may be required with a smaller down payment (i.e. less than 20%).

Conventional loans are often available for vacation homes but mortgages for such properties are typically accompanied by larger down payment requirements (at least 20%), higher interest rates and more conservative lending guidelines. If you intend on renting out your vacation home, then a lender may consider it as an “investment property” (as opposed to a “second home”), which tend to have even higher interest rates and down payment requirements (i.e. 25% or more). The reason for this is the risk profile of an investment property as owners may be more willing to walk away from their mortgage payment obligations when faced with financial hardship. To summarize, depending upon how you use your vacation home, expect to save at least 20%-25% of the purchase price as a down payment.

Fore more information on vacation home mortgages from America’s “big four” banks, click on the following:

• JPMorgan Chase
• Bank of America
• Wells Fargo
• Citigroup

Canadian Requirements

In Canada, down payment requirements for primary residences differ depending upon the purchase price of your home. Amounts range from 5% of the purchase price for homes $500,000 or less up to 20% of the purchase price for homes $1 million or more.

The rules also differ for vacation homes, in particular as between vacation homes purchased for personal use versus vacation homes used as a rental property.  As rental properties are often seen as higher risk, more stringent qualifying criteria may apply than if the vacation home is for personal use only. As outlined by National Equity Lending, you may still be able to buy a second home with as little as 5% down with the relevant insurance premium added to the mortgage. With 20% down, most lenders will finance your mortgage as a conventional loan. For rental properties, however, you will likely need at least 20% down and even then you are limited to only a few lenders who are willing to lend to you with no insurance premium added to the mortgage. In order to avoid insurance premiums and open it up to a larger pool of lenders, you will likely need at least 25% down.

Fore more information on vacation home mortgages from Canada’s “big five” banks, click on the following:

• BMO
• CIBC
• RBC
• Scotiabank
• TD

Advantages of a Higher Down Payment

A larger down payment has several advantages, including:

• More borrowing options
• Better interest rates
• Higher initial equity position
• Lower mortgage payments

Simply put, the higher the down payment the more loan options will likely be available to you at more competitive rates. By putting 30% down, for instance, lenders lower their risk profile by allocating some of the risk to you as the borrower. The thinking is that by having more “skin in the game” so to speak, you will be less likely to default on your loan. Also, your mortgage payments will be lower since you will be borrowing less money thereby paying less interest over the life of the loan. Further, if you intend on renting out your property then it will be easier to turn a profit since the cost of servicing your mortgage will be less.

Before deciding on a larger down payment, be sure to use our vacation home mortgage calculator to better understand the monthly costs of servicing your mortgage based on different down payment scenarios. It’s also a good idea to keep some savings left over as you may need funds for necessary maintenance and repairs following your purchase.

For more information on vacation home affordability, be sure you read our article on How Much Vacation Home Can I Afford?

The post Down Payment for Vacation Home: Requirements for Buyers in the United States and Canada appeared first on Vacation Property Online.

If you’re asking yourself: can I afford a vacation home and, if so, how much vacation home can I afford?, you should consider the following:

• Size of your down payment
• Your debt to income ratio
• Rental income
• Equity from primary residence

Be sure to explore our Can I Afford a Vacation Home Calculator to better understand what you can afford. 

Affording a Vacation Home

Many people who enjoy traveling to the same spot year after year will consider purchasing a vacation home. Not only are you able to visit your favorite destination every year, but you can also often enjoy a strong return on investment through appreciation in the value of the home. Financially, however, this isn’t always an easy decision. For homeowners who will need to take out a second mortgage, they often ask themselves how much vacation home can I afford?

There are a few ways to evaluate whether you can afford a vacation home and, if so, how much home you can purchase. The following are some of the primary considerations to keep in mind.

How Down Payment Impacts Affordability

Typically your down payment must be at least 5% of the purchase price, which will limit your affordability. Depending upon the price of your home and your lender’s requirements, a down payment of 20% or more may be required. Using 5% as an example, if you’ve managed to save up $25,000, then the maximum vacation home you can afford is $500,000 ($25,000 / 5%) regardless of your debt to income ratio (see below for further discussion). Assuming 20% is required, then the maximum vacation home you can afford is $125,000 ($25,000 / 20%). Be sure to speak to your lender to determine exactly what level of down payment is required.

Using Debt to Income Ratio

Your debt to income ratio will be a primary factor when deciding how much vacation home you can afford. Your debt to income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments (total monthly debt payments divided by gross monthly income). When it comes to your total debt to income ratio, most financial experts recommend keeping it at a rate of 30% or less for home expenses and no more than 43% overall. Most lenders also have their own specific criteria on limits. Of course, the lower your debt-to-income ratio is, the better.

Some lenders will allow you to have a higher ratio but the primary determination of your personalized ratio will depend on your own financial situation. For example, if you have a higher down payment available, you’ll be in a better financial situation as you will require less debt to purchase the home. Additionally, a higher credit score may mean that you can borrow with a higher ratio. Most lenders are going to want borrowers with a credit score of at least 640 or higher. Again, speak to your lender to determine their requirements.

So, how does all of this translate into what you can afford? For illustrative purposes let’s use a ratio of 43% overall and assume a gross monthly income of $10,000 (before taxes). This means that your total debts, including mortgage, home insurance and property taxes on your vacation property, can equal up to $4,300 per month (43% of $10,000). If payments for your primary residence total $1,500 each month and other personal loans total $1,300 per month, this means that you can afford to pay $1,500 per month for a vacation home ($1,500 + $1,300 + $1,500 = $4,300). Depending on the size of your down payment, this means that you can likely afford a vacation home with a purchase price of around $350K-450K on a 25 year amortization period based on current interest rates (try our vacation home mortgage calculator here).

How Rental Income Impacts Affordability

Offsetting the costs of owning a vacation home through rental income is a great way to stretch your dollar further and increase your borrowing capacity. Depending upon the lender, they may give you credit for up to 70% to 75% of the projected fair market rents (in Canada and the US, respectively) determined with an appraisal when buying a vacation home.

Using the above example, let’s say you’re looking to purchase a vacation home with an income suite. Your monthly mortgage is $1,500 for your primary residence and you have other monthly debt payments totaling $1,300. Now let’s also assume that your monthly vacation home payments will be $2,500. That would put your debt to income ratio at 53% overall ($5,300 / $10,000), or 10% in excess of what lenders will typically permit. But let’s also assume that you can expect to generate $1,500 per month in rent from the income suite. 70% of $1,500 is $1,050 meaning that, from a lender’s perspective, your debt to income ratio is now a more modest 42.5% overall (($5,300 – $1,050) / $10,000).

Of course, each lender has their own criteria so be sure speak with your lender as to how much credit you can expect from the rental income. You can also expect to pay 25 to 50 basis points higher for these types of mortgages as compared to owner-occupied home mortgages.

Borrowing Against Value of Existing Home

If you have equity built up in your primary residence, you may also be able to borrow against the value of your home to maximize your vacation home borrowing power. This can be achieved in a few different ways (e.g. home equity line of credit, second mortgage etc.) but the principle is the same: extracting value through the difference between the value of your home and the unpaid balance of your current mortgage. Click the video below for a brief description of how a home equity line of credit works.

Let’s say your home is worth $400,000 and you owe $100,000 on your mortgage. You’d have $300,000 in home equity. Assuming you can borrow up to 80% of the value of your home less the amount you owe (which varies by lender), you would have up to $220,000 (80% of $400,000 less outstanding mortgage of $100,000) at your disposal towards an investment in a vacation home. At even 50% of the value, you will still have $100,000 available.

Of course, this option is only available to homeowners that have seen appreciation in the value of their home and/or paid off a large portion of their mortgage. In any case, this may be a viable option for many homeowners.

Owning a Vacation Home

Owning a vacation home is a lifelong dream for many and, with some creative financial planning, it may be more attainable than you think.

Be sure to check out our further resources on buying a vacation home and owning a vacation home, including everything you need to know before buying.

The post How Much Vacation Home Can I Afford? appeared first on Vacation Property Online.

For most homeowners who are interested in expanding their real estate portfolio, recreational property often comes to mind. However, this is not a term that everyone may fully understand. For instance, what is recreational property? What types of recreational property are there? What can recreational property be used for? In this article we explore these questions a little further.

If you would like to determine whether you can live on recreational-zoned land, be sure to explore our article here.

What Does Recreational Property Mean?

Simply put, recreational property is purchased for recreational purposes, whether it be for hiking, fishing, days on the lake or ATVing, and may be specifically zoned for “recreational” use. For this reason, recreational property is different from a primary residence or investment property. Whereas a primary residence is a dwelling where a person usually lives, a recreational property is typically associated with occasional use. Whereas an investment property is bought with the intention of earning a return on investment, a recreational property is bought for the enjoyment of it. A recreational property may include land with a structure on it, such as a cottage or lake house, or a piece of bare land (more on this below). Yet, it’s the special moments with friends and family while enjoying recreational activities, and memories resulting therefrom, that truly distinguish a recreational property from other property types.

Types of Recreational Property

When considering the types of recreational property available, it’s important to note that there isn’t one specific type. Further, depending upon the zoning of the property, there may be limits or restrictions on what structures can be built on the property (more on that below). However, these are some of the most common types of recreational property:

• Cottages, Cabins and Lake Houses – When it comes to recreation, nothing says the great outdoors quite like a cottage, cabin or lake house. Given their proximity to nature, these recreational properties are often purchased for weekend getaways or summer vacations with the family and friends. With a cabin, cottage or lake house, various activities await as does the promise of rest and relaxation away from the busy city life. Given their remoteness, these recreational properties are also typically more affordable than properties close to the city. It’s no surprise that these property types are some of the best examples of recreational properties.
• Condos – Owning a condo, whether through a strata, timeshare or fractional ownership, is another common type of recreational property. Condos are attractive for a number of reasons including the fact that they are typically more affordable than a detached home and involve less maintenance. Recreational condo developments may also have various amenities on site, such as a pool, tennis court and exercise facility.
• Vacant Land – Some people may choose to buy vacant land for recreational purposes. In such a case, you may use the property for camping or sporting purposes. For example, hiking, biking or ATVing are all popular activities of recreational property enthusiasts.

What Can Recreational Property be Used For?

In order to understand what any particular recreational property can be used for, whether it’s located in the Canadian Rockies or Florida Everglades, you will need to know local zoning regulations and restrictions. This may not only limit what structures can be built on the property, if any, but also the activities that are permitted on the property. Before buying, be sure to seek appropriate advice from a land use expert in the area or speak with the local zoning department to better understand what’s permitted.

Conclusion 

For anyone unfamiliar with the term, a recreational property is any property that is used for recreational purposes and includes many different property types. More narrowly, recreational property may refer to those properties zoned for recreational use. Importantly, the lasting memories from time spent with friends and family while enjoying various recreational activities is a distinguishing characteristic of a recreational property.

The post What is Recreational Property? An Overview of Recreational Property Meaning appeared first on Vacation Property Online.

As more and more people look to expand their real estate portfolio, the recreational housing market continues to see strong demand in the United States and Canada. For some, a second home may represent a welcome escape from the busy city life. For others, a second home may represent an opportunity to generate a return on investment as a revenue-producing vacation rental or other investment property. Regardless of the motivation, second home sales are on the rise.

For anyone who is considering taking out a mortgage in order to purchase a second home, the interest rate available to you will be an important consideration. Inevitably, the question will arise: are mortgage rates higher for second homes? As this article will show, typically mortgage rates are higher for second homes given the risk profile associated with such properties. Your personal financial situation, however, will also impact the interest rate available to you.

What Interest Rate Can You Expect on a Second Home?

While the available interest rate can vary based on the property type, your financial profile and the local market, amongst other factors, you can expect to pay rates that are 0.25% to 0.5% higher than you would for a primary residence. Therefore, if a bank is offering a 3.0% interest rate on a primary residence, you can expect to pay between 3.25% to 3.5% on a second home mortgage.  Of course, this is just a general rule of thumb so be sure to shop around for the best rate.

To illustrate the difference this makes on monthly payments using different mortgage amounts, we’ve prepared a few examples (all assuming a 25 year amortization period):

• Mortgage amount: $250,000
  • Monthly payment at 3.0%: $1,185.53
  • Monthly payment at 3.5%: $1,251.56
• Mortgage amount: $500,000
  • Monthly payment at 3.0%: $2,371.06
  • Monthly payment at 3.5%: $2,503.12
• Mortgage amount: $750,000
  • Monthly payment at 3.0%: $3,556.58
  • Monthly payment at 3.5%: $3,754.68
• Mortgage amount: $1,000,000
  • Monthly payment at 3.0%: $4,742.11
  • Monthly payment at 3.5%: $5,006.24

Be sure to use our mortgage calculator for more specific calculations. 

Why Are Mortgage Rates Higher For Second Homes? 

Interest rates are typically higher for mortgages on second homes when compared to primary residences since lenders view these purchases as being inherently riskier. Unlike a primary residence, a second home is not a necessity. If the owner of the property goes into financial distress, chances are that this property will be the first asset to go into default. Lenders realize this and therefore often charge a higher rate given the heightened risk profile.

Due to the increased risk of default, mortgages on second homes typically have stricter lending criteria, higher interest rates and larger down payment requirements. Banks will take a close look at your credit score, income and outstanding debts to ensure you can handle the additional monthly payments (more on this later). For the down payment, while certain lenders may require a down payment of only 5% for a primary residence, many lenders in the United States and Canada will require a down payment of at least 20% for a second home.

How Do Personal Finances Impact Mortgage Rates for Second Homes?

Depending on your lender, credit history and current financial state, you may be able to secure a reasonable second home mortgage rate. You may, however, end up paying a higher rate if you have a poor credit score or your debt to income ratio is less than desirable. Your debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments (total monthly debt payments divided by gross monthly income). 

So what credit score and debt to income ratio should you strive for? A credit score of 700 or more is where you can expect to pay the lowest rates both in the United States and Canada. It’s recommended that homeowners avoid going over 36% of their gross income when factoring in total debt payments, although some lenders may permit a borrower to have a ratio of up to 43%. Keep in mind that rental income can be used to offset the costs of servicing the mortgage and certain lenders may give you credit for up to 70% to 75% of the fair market rents. 

How Can You Secure the Best Rate

The initial second home mortgage rate quoted by your bank may not necessarily be the best rate. Rather, working with multiple lenders or a reputable mortgage broker will help secure the best possible rate. It’s also important to get your finances in order by having a strong credit history and maintaining a serviceable debt to income ratio.

So are mortgage rates higher for second homes? Typically yes but as this article illustrates there are certain things a homebuyer can do to secure the best rate.

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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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If you are interested in buying a vacation home then understanding the true cost of owning a second home is a must. In this article we explore the typical types of vacation home costs in the interest of ensuring that buyers of vacation homes better understand the true cost of ownership. In particular, we explore:

One-time Costs

• Down payment
• Property transfer taxes
• Conveyancing fees (legal)
• Renovations 
• Furnishings

Recurring Costs

• Mortgage payment
• Property taxes
• Insurance
• Utilities
• Cable and Internet
• Management fees
• Cleaning fees
• Maintenance and repairs
• Ongoing accounting and legal fees

Other Costs

• Strata fees
• HOA fees
• Resort fees
• Vacancy, general excise and other taxes
• Indirect (depreciation, opportunity cost)

Note that this articles is intended to provide a general overview of typical costs associated with owning a vacation home. For specific legal or tax advice, please speak with your professional advisers. 

One-time Costs

Initial upfront vacation home costs include:

• Down payment. As a general rule of thumb you should expect to provide at least 20% of the purchase price as a down payment in order to qualify for a second home mortgage in Canada or the United States. You may qualify for a mortgage with a lower down payment through private lenders but mortgage rates are typically much higher and the terms more onerous.
• Property transfer taxes. Property transfer tax is generally payable on all property transactions involving a change to the property’s title and the rate will vary based on jurisdiction. Additional property transfer taxes may also be payable in certain jurisdictions. For instance, in certain specified areas of British Columbia if you are a foreign buyer you must pay the additional property transfer tax of 15%. 
• Conveyancing fees. In order to get title to the property, you will need to hire a lawyer/notary to conduct necessary title searches, record title and register the mortgage on title. 
• Renovations. If the property requires renovations then the costs associated with bringing the property up to standard will need to be factored in. These costs can be quite extensive so be sure to complete a thorough home inspection prior to completing the purchase. Renovation costs can also be considered a reoccurring expense, although major renovations may not be necessary for 10 years or more. 
• Furnishings. Unless negotiated in the purchase price, you will need to buy furniture, linens, kitchenware and other necessary household items.

Recurring Costs

Following your initial purchase, you will need to keep in mind the following recurring costs of owning a second home:

• Mortgage. One of the largest ongoing expenses will be the monthly mortgage payment. Note that mortgage rates for vacation homes may be slightly higher than for primary homes. Working with a knowledgeable mortgage broker will help you narrow down the banks that will lend to you and secure the best rate. 
• Property taxes. Annual property taxes will vary based on jurisdiction. Be sure to ask the seller how much they paid in property taxes last year which will give you an idea as to the annual cost going forward.   
• Insurance. Talk to your insurance broker about appropriate insurance for your vacation home. Insurance rates for vacation homes will often be higher, especially if the property will be left vacant for extensive periods of time. 
• Utilities. The cost of electricity, heat and water should all be factored in. 
• Cable and internet. Cable and internet packages will vary in price and may be unavailable entirely for more remote locations. 
• Management fees; cleaning fees. If you will be renting out the property short term and would like to hire a manager, expect to pay 10%-20% of revenue depending upon the services provided. Similarly, you will also need to account for cleaning fees. 
• Maintenance and repairs. Be sure to allocate enough money to annual expenditures for maintenance and repairs. A simple rule of thumb is to budget $1 per square foot per year for maintenance and repair costs.
• Accounting and legal fees. Annual accounting and/or legal fees may be necessary and, depending upon the location, it may require engaging accounting and legal advice in the local jurisdiction.

Other Costs of Owning a Second Home

Other costs and expenses that may vary based upon property type and location include:

• Strata, HOA and resort fees. Strata fees, homeowners association (HOA) fees or resort fees may all be payable on a monthly or yearly basis by owners of certain types of residential properties so be sure to confirm these amounts in the due diligence process. 
• Vacancy,  general excise and other taxes. These types of taxes are location specific. In Vancouver, BC, for instance, properties deemed empty will be subject to a tax of 1% of the property’s 2019 assessed taxable value. In Maui, the State of Hawaii charges a General Excise Tax on the rent collected and all services including repairs and yard care. As you can see, you will need to familiarize yourself with local tax regulations. 

Lastly, it is important to consider the the indirect costs of owning a vacation home, including:

• Depreciation. As a physical asset, homes depreciate in value over time. On average, homes depreciate 3.636% per year according to Investopedia. While you may not feel this expense directly, sooner or later you will need to renovate or rebuild your vacation home, which needs to be taken into account when purchasing a vacation home.
• Opportunity cost. What would you have invested in had you not purchased a vacation home? Passive investment opportunities like mutual funds may be an attractive alternative involving less time and commitment. Before investing a significant amount of time and money into something you should consider what alternatives are out there and whether foregoing those alternatives are worth it. 

Conclusion

There are various vacation home costs, both one-time and reoccurring, that need to be taken into account before purchasing a vacation home. These costs vary based on multiple factors, including property type and jurisdiction. Understanding the true cost of owning a second home is a must and having a knowledgeable team to assist you in that process will pay dividends. 

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What are the best vacation properties to buy? You may be asking yourself this very question if you are considering purchasing a vacation property. Should you purchase a house with room for the whole family or a condo in the interest of reducing the burden that comes with home ownership? Or perhaps a timeshare to avoid a larger cash outlay? In this article we take a closer look at the most common recreational property types and, in particular, the pros and cons of owning a vacation home, condo, timeshare or other vacation property type.

Best Vacation Properties to Buy: Preliminary Considerations

The first thing you should ask yourself is the reason behind buying a vacation property. Have you always dreamed of owning a vacation property? Having a place to escape the busy city life or a place to pass down to your children? Or are you simply looking to make a savvy real estate investment? Perhaps you are looking at renting out your property short term on Airbnb or VRBO.

The answer to these questions will help determine the appropriate vacation property type for you. For instance, if you’re seeking seclusion then perhaps a remote cabin is the best choice. If, on the other hand, you are looking to use the property only occasionally and otherwise want to rent it out short term, you may wish to buy a turn-key condo. If you are purchasing a vacation property as a lifestyle choice rather than an investment and are fine with limited use then perhaps a timeshare is appropriate.

In short, the motivation behind your purchase is an important factor to consider.

From there, budgetary considerations, owner involvement and other matters described below need to be taken into account.

Vacation Home: King of the Castle

When considering the best vacation properties to buy, the analysis should begin with a vacation home. As a homeowner in Canada or the United States, you not only own the house but also the land on which the house is situated. As “king of the castle” you are not subject to the same restrictions that come with owning a condo or other strata property. But owning a home also comes at a cost. Some of the pros and cons of owning a vacation home include:

Pros

• More space/privacy
• Unique compared to a condo
• More customizable through personal design touches

Cons

• Higher purchase price (see how far your dollar goes across Canada here)
• Higher maintenance and utilities costs
• Tougher to rent out short term

Bonus: annoy your friends by referring to your vacation home as a chalet, villa, compound or other pretentious description to show what a big deal you are!

Vacation Condo: Anything You Can Do I Can Do Better

As an owner of a condo, you own the interior space of your unit whereas common areas and outdoor spaces are owned in common with the other owners in your building. Monthly strata fees will cover the general expenses of the strata and in some cases special assessments will be levied when major repairs to the common areas and building exterior are required. If the strata is well run, owning a condo can be a lot less work and responsibility. Some of the pros and cons of owning a vacation condo include:

Pros

• Lower purchase price compared to a house
• Lower maintenance costs
• Amenities on site
• Easier to rent out short term
• Better security

Cons

• Less space/privacy
• Less control
• Strata by-laws may restrict use

Bonus: if you buy a top floor unit you can brag to all your friends that you own a penthouse 😉

Timeshare: It’s a Lifestyle Choice

With a timeshare, you own a portion of a vacation property that you can use on a limited basis, usually once a year.

Depending upon the type of timeshare (fixed week, floating etc.), your usage rights may vary slightly. For these reasons, a timeshare is more of a lifestyle purchase than an investment. No matter the type of timeshare, be sure to take some time before completing a purchase, as buying a timeshare can often be an emotional decision. What seemed like a great idea following the consumption of five margaritas may turn into a feeling of regret. Some of the pros and cons of owning a timeshare include:

Pros:

• Less responsibility
• Affordable (pay for use model)
• Certainty as to where and when to take your vacation

Cons:

• Annual fees
• No control over the property
• Difficult to resell

Bonus: a free meal likely awaits anyone willing to suffer through attend a timeshare sales presentation!

Other Vacation Property Types

• Townhouse/Duplex – if you’re looking for the conveniences of a condo but with more space and privacy then this may be a good option. You’ll also have your own private entrance without the need for an elevator typically seen in condo towers. Unlike a house, however, you won’t have any physical separation from your neighbors and will typically have a smaller yard, if any.
• Fractional Ownership – fractional ownership involves several buyers that each holds an equal part of the title. This differs from timeshares where property title is 100% owned by the principal owner. With fractional ownership you are also often allowed to use the property for a longer period of time than timeshares. For these reasons, fractional ownership is a legitimate investment with opportunity to see an increase in the value of your fractional ownership over time.
• Water Access Only – the obvious benefit to water access only property is privacy, yet remoteness and inaccessibility may deter many buyers. Simple conveniences like restaurants and grocery stores may be difficult to access. Such properties may also be inaccessible by first responders in the case of an emergency.
• Leasehold – a buyer of leasehold property will have an exclusive right to occupy the property for a specified period, in some cases up to 99 years or more. At the end of the lease, the right to occupy the property reverts to the owner.

Other things to consider

• Are you particularly handy? If not, you may want to steer clear of buying an older home.
• How much time do you have to devote to care and maintenance? If you do not want to be very hands on then you should consider buying a newer condo or hiring a property management company.
• How accessible is the property? If its further than a two hour drive, do you have someone locally that can assist in the case of an emergency?
• Have you visited the location you’re interested in? If not, a lot of insight can be gained by renting a comparable property in the area before taking the plunge and completing a purchase.
• Do your due diligence no matter what type of recreational property you are purchasing. A complete home inspection will be important when purchasing a home and reviewing the strata by-laws and recent minutes will be important when purchasing a condo. For timeshares, be sure to read all of the relevant documentation to understand exactly what you’re buying into.

Conclusion

Purchasing a vacation property is the realization of a lifelong dream for many. Depending upon the type of property, it’s also a significant financial undertaking and time commitment. Before making any such purchase, be sure to consider the motivation for your purchase, your budget, your ability and willingness to handle maintenance and the other items noted above.

So what are the best vacation properties to buy? If this article has shown anything, it’s that there are many questions and other considerations that need to be taken into account. Many of us at Vacation Property Online wrestled with these very questions before taking the plunge. After having asked these questions, completed our due diligence and made the purchase, we can assure you that it has been a very rewarding experience. Happy hunting!

The post Best Vacation Properties to Buy: Home or Condo? appeared first on Vacation Property Online.

Featured markets include:

• Tofino, BC
• Whistler, BC
• Kelowna, BC
• Banff, AB
• Muskoka Lakes, ON
• Niagara on the Lake, ON
• Mont Tremblant, QC
• Cape Breton Island, NS

To launch the map, click here. Scroll through the map and the associated illustrative listings to obtain sample information at each price point, including property type, square footage, number of bedrooms and bathrooms and special features such as waterfront. Note that the information is based on data as of the date specified and is provided for illustrative purposes only. As data is derived from listing prices it may not be indicative of sales prices.

Be sure to also check out our detailed overview of the above markets here.

So How Much Do Vacation Homes Cost Across Canada? 

The Tofino and Whistler regions are among the most expensive recreational real estate markets in the country. For $500,000, you can purchase an 860 sq ft condo in Tofino or 450 sq ft studio in Whistler. By contrast, $500,000 will get you almost 2,000 sq ft or prime waterfront living in the Cape Breton region or a three bedroom, two-and-a half bathroom townhouse in Kelowna. $500,000 will also get you a three bedroom, one-and-a-half bathroom waterfront cottage in the Muskoka Lakes region. A more modest two bedroom condo is available at this price point in Banff. 

At the $750,000 price point, condos and townhouses are the norm out West, although you can purchase a four bedroom, three-and-a-half bathroom house in Kelowna. In Whistler, a one bedroom, one bathroom condo is available while a larger two bedroom and two bathroom condo is available in Tofino. In Banff, a three bedroom, 2 bathroom townhouse covering over 1,300 sq ft is available. Further east, three and four bedroom homes are available in Niagara-on-the-Lake and Mont-Tremblant, respectively. Finishing out East is the Cape Breton region where a three bedroom, four bathroom home on the lake is available at this price point.

For $1 million, houses are still out of reach in Whistler and Banff although two and three bedroom condos are available, respectively. Otherwise, houses and waterfront cottages are the norm in all other markets, including a three bedroom and four bathroom house in Niagara-on-the-Lake and almost 1,800 sq ft of waterfront living in the Muskoka Lakes region. $1 million will also get you over 3,000 sq ft of house in Mont-Tremblant. And finally out in Cape Breton, $1 million will get you a four bedroom house (on the lake).

Finally, if you have money at your disposal then consider buying your own island in Muskoka Lakes, Ontario for a cool $3.5 million. At $2.5 million, Tofino waterfront is within reach and, at a modest $1.5 million, relatively speaking, almost 4,000 sq ft of luxury waterfront awaits on Cape Breton island.

Here is a more detailed overview of how much vacation homes costs throughout Canada’s most popular vacation and recreational destinations:

Thanks for reading and be sure to contact us if you have any questions or feedback.

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