As a real estate investor and owner of a vacation rental property, I’ve dealt with numerous ownership questions first-hand. I’ve also read various resources over the years in order to supplement my own experiences. Yet, there are many different resources out there on various topics, from the true costs of owning a second home to the rules and regulations governing different vacation property types such as waterfront properties. As a result, it’s sometimes hard to get a clear picture of what you should know before buying a second home and what ownership is truly like. With this in mind, I set out to create one resource that provides you with everything you need to know before buying a second home and, in particular, a vacation home.  

I should point out that I use the terms “second home” and “vacation home” interchangeably, mostly because second homes are often bought as vacation homes. Still, if you’re looking to buy a second home for another purpose, such as a part-time residence, investment property or eventual retirement home, the principles discussed in this article will still be relevant. Also, while this article focuses on subjects that are relevant for vacation homeowners in the United States and Canada, most topics will be relevant in other jurisdictions. With this in mind, if you’re wondering whether buying a second home is right for you, then you’ve come to the right place.

For an overview of how to buy a vacation home, explore my article on How to Buy a Vacation Home: A Practical Guide.

Setting the Stage

As you contemplate buying a second home, keep in mind that you will have your own unique set of circumstances, from personal finances to the locations you are interested in. Therefore, you should seek appropriate advice from qualified advisors, including accountants, lawyers and realtors, in your hunt for a second home. I can’t emphasize enough the importance of utilizing each of these experts, who have saved me countless headaches and likely thousands of dollars. Still, based on my own knowledge and experience, this is everything you need to know before buying a second home.

Types of Second Homes/Vacation Properties

As you consider buying a second home, a logical starting point is to consider the various types of properties. First up are the usual suspects in houses, condos, cabins and cottages. 

Houses, condos, cabins and cottages

Each of these property types are fairly well understood so I won’t describe them in detail, other than to highlight what you really need to know for each: 

• House vs. condo. With a vacation house, you’ll have more privacy than a condo but also higher maintenance costs. One of the things I like most about my vacation condo is that it’s fairly hands off. I can leave it vacant for extended periods of time and, other than minimal upkeep, I don’t have to worry about major repairs or landscaping the yard, for instance. It does help, however, to have a proactive and well run strata (or HOA). Still, if you want more privacy and can handle more responsibility and expense, a vacation house may be right for you.
• Cabin vs. cottage. While cabins and cottages differ primarily by the materials used to construct them, I typically consider them one and the same. Sure there may be different maintenance considerations for a log cabin versus a brick cottage, but the premise is the same. Typically a cabin or cottage is located in a more remote location close to nature. Thus, in addition to the considerations above for a vacation house, you’ll need to take into account how remoteness will impact your use and enjoyment.

Waterfront and water-access only

Waterfront properties are unique for many reasons, including the additional regulations that govern such properties and additional maintenance required. They’re in high demand and as a result typically hold their value. But the premium paid for waterfront is not the only relevant consideration as you need to keep the following in mind before buying a second home on the waterfront:

• Home inspections. In addition to the typical items to look out for in a house inspection, corrosion caused by salt in the air and mildew/mold issues from higher moisture levels can all cause damage on a waterfront property. Boundary surveys, elevation certificates and water quality tests can also be important. For instance, how far above the sea level or the lake shore is the house and is the area prone to flooding? In short, be sure to hire qualified home inspectors, surveyors and other experts before buying a waterfront property.  
• Understand what you own. With waterfront property, it is particularly important to review the legal description to determine where the lot extends. Additionally, you will need to determine whether there are any additional encumbrances on title that would otherwise limit your use of, or access to, the waterfront. Whether the property is located in the United States or Canada, it may be worthwhile to run this by a real estate lawyer before buying a second home on the waterfront. 
• Understand the limitations that come with it. Understanding what restrictions come with the property and what you can build on it are particularly important. Governmental regulations on waterfront properties govern such things as site density, minimum building setbacks from the water, the kinds of uses that are permitted, whether you can build a dock or seawall and even building design. In the United States and Canada, you may also need approval from other government departments including the U.S. Army Corps of Engineers and Department of Fisheries and Oceans (in Canada) for work in and around the water.
• Additional maintenance. Not surprisingly, waterfront properties require additional maintenance and expense in order to keep the property in tip-top shape. Potential issues include:
  • Humidity resulting in mold 
  • Corrosion from salt in the air (in the case of oceanfront)
  • High winds causing structural damage 
  • Falling trees in open areas
  • Floods 

In order to combat these issues, consider storm-proofing the house and ensure you have adequate insurance coverage. In short, waterfront properties are expensive to maintain so be prepared to pay double a typical maintenance budget.

• Water-access only. For some, owning your own private piece of paradise is appealing yet the remoteness and/or inaccessibility of water-access only properties may deter some buyers. Obtaining financing for these types of properties can also be difficult. While not for everyone, the general feedback I’ve received from other owners is that water-access only properties are an affordable alternative if you have access to reliable transportation and are willing to forego modern day conveniences. 

Fractional ownership and timeshare

Fractional ownership structures and timeshares are also an affordable option for those interested in dipping their toe into vacation home ownership. I’ve personally never been drawn to these types of properties because I’ve always (a) viewed outright ownership as a better investment and (b) liked to have complete freedom and control in terms of the use of my property. With this in mind, this is what you need to know before buying a second home that falls into one of these categories:

• Fractional ownership.  With partial ownership, several buyers each hold an equal interest in the title to the property. This is different from a timeshare where title to the property is 100% held by you as the principal owner. As an owner of a fractional interest in a vacation home, you’re also often allowed to use the property for a longer duration than a timeshare. From an investment perspective, you may see an increase in the value of your fractional interest over time.
• Timeshare – With a timeshare, your usage rights will vary slightly depending upon the type (e.g. fixed week, floating etc.). You also have no control over the property and they are notoriously hard to sell. Yet, timeshares are quite affordable, there is less responsibility as an owner and you’ll have certainty as to where and when to take your vacations. For these reasons, a timeshare is a lifestyle purchase as opposed to an investment. Importantly, I’ve heard of too many cases of timeshare owners making emotional decisions when buying-in originally so be sure to take some time before buying.

Leasehold

An owner of a leasehold property has an exclusive right to occupy the property for a specified period, in some cases up to 100 years or more. At the end of the lease, the right to occupy the property reverts to the owner. For this reason, leasehold properties are typically more affordable and there are often restrictions with what you can do with the property during the term of the lease. If you’re looking at your second home as an investment property, then I would avoid buying a second home that is a leasehold since you don’t actually own the property and therefore don’t typically enjoy the same upside in price appreciation. 

Different Second Home Uses

In addition to buying a second home for vacation purposes as a “home away from home”, there are many different reasons to buy a second home. Here are a few insights I’ve learned over the years about these other specific uses:

Vacation home vs second home vs investment property

I find there is a lot of confusion as to the difference between a vacation home, a second home and an investment property and the implications of each. Importantly, the designation of your property can have implications on your mortgage terms and tax treatment. While I encourage everyone to obtain their own independent tax advice, here are some important things to know:

• Vacation home vs second home. In short, there is no real difference between the two. More specifically, a second home is a residence you intend to occupy for part of the year in addition to your primary residence. Typically, second homes are owned as vacation properties but they could be used for other purposes (such as a condo in the city for work). 
• Second home vs investment property. An investment property differs from a second home in that it is owned primarily for investment purposes, typically through rental income, rather than as a second residence. A vacation rental property is one such example of an investment property, where the primary purpose is to generate income from the property as opposed to using it as a second home. 
• Mortgage implications. Mortgages for second homes will typically be associated with stricter lending criteria and higher interest rates than primary residences. For an investment property, such as a vacation rental, you can expect interest rates to be even higher and even higher down payment requirements, although every lender will have their own lending terms. 
• Tax implications. Depending upon the designation of your vacation home as a secondary residence or revenue-producing investment property, and the thresholds set by the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA), you may be required to report and remit tax on any income derived from your property. Additionally, taxation of capital gains upon the sale of your vacation home is treated differently from a primary residence. 

For a more complete discussion of mortgage terms and tax implications for vacation homes, see below under Vacation Home Financing and Tax Considerations, respectively. 

Owning a vacation rental property

Thanks to the popularity of vacation rental platforms such as Airbnb and VRBO, it’s easier than ever to own and operate a vacation rental property. Yet there are many items to take into account before investing in one, from the tax implications of ownership to how to manage your property. While I speak to tax considerations a little later on, here are some other things you need to know before buying a vacation rental property:

• Short-term rental regulations. Many cities and towns in the US and Canada have restrictions on renting out your property short-term. This can range from a simple requirement to obtain a business license to an outright ban altogether so be sure you understand the local regulations. Rules can change overnight as well so it’s best to invest in those areas that cater to tourists, such as resort municipalities, where vacation rentals are viewed more favorably. 
• Vacation rental platforms. I’ve used multiple platforms over the years and each of them has their strengths and weaknesses. Importantly, it’s never a good idea to rely 100% on one vacation rental platform so I recommend using multiple platforms. I also recommend that you create your own website so that you can (a) take direct bookings through friends and family without having to pay any fees associated with rental platforms and (b) slowly build-up search engine optimization over time in order to show up in Google search results. If you do end up taking direct bookings, ensure you require a sufficient damage deposit and execute a short term rental agreement like the one provided here.
• Property management. When deciding whether to manage the property yourself or hire outside management, it ultimately comes down to your willingness to spend additional time and resources dealing with guests or whether you’re willing to pay someone else to do it. If you decide to hire a property manager, expect to pay between 25% to 30% of the rental fees. My wife and I manage our vacation rental and, in my experience, the biggest issue is finding good, reliable cleaners. If you’re willing to do the cleaning yourself then that’s one less issue to worry about. 
• Cell phone and internet access. This is more of an issue for remote properties, but you’ll need to be able to communicate with your guests and deal with issues as they arise. It’s therefore important to have reliable cell phone reception and internet access. 
• Insurance. This one should be obvious but you’ll need to ensure that your insurance policy adequately covers a vacation rental property. More specifically, be sure to understand the specific terms of your policy. For instance, my policy requires all guests to be 21 years or older so our house rules require it.
• House rules. Speaking of house rules, it’s important to establish house rules for your guests to follow. By doing so, you can minimize damage to your home and otherwise control the guest experience.
• Vacation rental mortgages. In order for your lender to properly assess the risk profile of your loan it will need to understand the proposed use of the property. Accordingly, be sure your lender is aware that you intend on renting out your property when you submit your loan application.

Owning a family vacation home

Dealing with family dynamics can be difficult when it comes to managing a vacation home that is shared by multiple family members. Establishing house rules and splitting up the time equitably between family members are each important. Having a proper exit strategy is also particularly important in case things don’t work out as planned or one of the family members experiences unexpected financial hardship. Before buying a vacation home with a family member, consider whether ownership as tenants in common makes more sense than joint tenants. With a tenancy in common, each family member may control an equal or different percentage of the vacation home and has the right to leave their share of the property to any beneficiary. This provides more flexibility than joint tenancy where, upon the death of an owner, title passes to the surviving owner. Note, however, that if there is a mortgage on the property, typically all borrowers sign the mortgage documentation meaning that if there is a default the lender may realize the debt on all family members.

Owning a weekend home

With a weekend home, the property will be vacant during the week when not in use, perhaps even over the winter months entirely. With this in mind, here is what you need to know:

• Costs vs benefits. With all vacation homes, and weekend homes in particular, you’ll need to ask yourself how much you can reasonably expect to use the property? In particular, ask yourself whether it makes more financial sense to rent versus own a place in your desired area. If you can regularly rent something for a reasonable price, then perhaps it makes more sense to rent instead of own.
• Travel time. Personally, I’ve always steered away from trips that are 3 hours or more unless I am planning on staying there for three or more days. Ideally, your total travel time will be under two hours if your vacation home will be used primarily for weekend use. Otherwise I just find that you spend too much time travelling to your destination as opposed to actually enjoying it. For other travel time guidelines, I find these rules of thumb useful. 
• Secure storage. If you want to avoid packing, securing and transporting all of your gear every weekend, such as a boat, ATV, paddleboard, kayak or canoe, I recommend having secure storage on site where these items can be permanently stored. 

Second Home Financing

Securing sufficient financing to buy a second home, with reasonable terms, may be the most important consideration for many would-be second homeowners. As mentioned earlier, mortgages for second homes will typically be associated with stricter lending criteria and higher interest rates than primary residences. For vacation rental properties, you can expect interest rates to be even higher in addition to even higher down payment requirements. For reference, even though I have a strong credit history, consistent income and sufficient savings for a 20% down payment, only one of the Big Five Banks in Canada was willing to lend to me when I purchased my vacation rental property and my mortgage was about 75 basis points higher than a mortgage for a primary residence. The reality is that there are fewer lenders willing to lend you money to buy a vacation rental, and those that do require a higher interest rate due to the increased risk profile.

Curious to know about how much you can afford in a second home? Be sure to explore this second home affordability calculator.

Based on my own experience, and the stated policies of major banks in the US and Canada, here is what you need to know:

• Credit score.  A credit score of 700 or more will increase your chances of approval, however a minimum of 640 is typically required.
• Interest rates. Expect interest rates to be as much as 0.25% – 0.5% higher than primary residence interest rates. For a vacation rental property, you can expect interest rates to be even higher (e.g. 50 to 75 basis points). With today’s low interest rate environment, however, it’s a great time to get affordable vacation home financing.
• Down payment. Expect to pay between 20% – 30% as a down payment. To lower the risk of default, lenders require higher down payments.
• Maximum debt-to-income ratio. Your debt-to-income ratio should be no more than 43% overall. Your debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt. This includes the mortgage on your primary residence, the new mortgage on your vacation home and any other outstanding debts. 
• Distance from primary residence. In the United States, if you want to take advantage of the more beneficial lending terms (e.g. lower interest rate) associated with second homes as opposed to investment properties, your second home must typically be at least 50 miles away from your primary residence. Otherwise, your second home may be viewed as an investment property in the eyes of a lender. In Canada, the distance from your home will similarly be taken into account as to whether you truly intend to use the home as a secondary residence or an investment property.

Some of the best ways to finance a second home include:

• Second home mortgage. This is the same as a traditional mortgage except that a second home mortgage will exist over, and be secured against, your second home as opposed to your primary residence. 
• Home equity line of credit. A HELOC acts much like a credit card in that you can borrow up to a certain limit and are only required to pay interest on the amount actually borrowed. In order to be eligible, you will need to have equity available in your existing home. Depending upon the lender, you may be able to utilize up to 80% of the equity in your home (or lower in the case of federal financial institutions in Canada), assuming there is no outstanding mortgage or other loan secured against your home.
• Second mortgage. A second mortgage is just that – a second mortgage over your primary residence. These are riskier from a lender’s perspective as the lender will be in second position to the first lender should you default. 
• Cash-out refinance. With a cash-out refinance, you cancel your existing mortgage and enter into a new mortgage with a larger amount than owed on the previous mortgage. You can then use the extra cash to buy a vacation home.
• Private lenders. If traditional banks won’t lend you money, then you may be able to obtain financing from private lenders such as friends, family, a private investor or even peer-to-peer online lending. Just be aware that private lenders typically charge higher interest rates and/or other fees given the heightened risk in lending to someone that the banks won’t.  

True Cost of Owning a Second Home

Before buying a second home, it’s important to understand the true cost of ownership in order to ensure you can afford the carrying costs. In my experience, people tend to underestimate ownership costs so you can expect your monthly bill to be higher. To begin with, let’s look at my own example.

For an accurate estimate of your monthly ownership costs, be sure to explore this cost of owning a vacation home calculator. 

Vacation Home Cost Example

As an example, here is a breakdown of the one-time costs and ongoing carrying costs of my vacation rental property (all in Canadian dollars), which was purchased for $715,000 at the beginning of 2019 and was partially furnished:

• One-time costs:
  • Down payment: $143,000 (20% of purchase price)
  • Property transfer taxes: $12,300
  • Conveyancing fees and disbursements (legal): $1,630.87
  • Minor renovations and furnishings: $4,743.41
  • Special assessment in Fall of 2019: $4,029.75
• Recurring costs (monthly):
  • Mortgage: $2,898.26
  • Property taxes: $246.96 ($2,963.52 annually)
  • Insurance: $70 ($840 annually)  
  • Utilities: $40
  • Cable, internet and streaming services: $122
  • Maintenance and repairs: nil 
  • Ongoing accounting and legal fees: $41.67 ($500 annually)
  • Strata fees: $557.83

Based on the above, my monthly carrying costs are $3,976.72 but I would expect that number to be slightly higher after factoring in additional nominal costs not reflected above. If I add the one-time costs (e.g. property transfer taxes, furnishings, special assessment etc.) and spread them out over the 2.5 years I have owned my home, my monthly carrying costs have been roughly $4,733.52 over that period. Further, while I have not yet spent any material amount on repairs and maintenance, I expect this will catch up to me soon and that my spending will be in line with a more typical allocation of between 1% – 4% of my home’s value being spent annually on maintenance.

Other costs that may be relevant depending upon the circumstances and location of your property include:

• HOA or resort fees
• Vacancy, general excise and other taxes (location/use specific)
• Management, cleaning and other vacation rental ownership fees

Despite your best efforts to plan for everything, I can attest to the fact that unexpected costs arise from time to time. If it’s not a special assessment from your condo association, then it will be your hot water tank or furnace that will give out. As such, keep some cash available for these unexpected costs. 

Opportunity Cost

Perhaps one of the most overlooked costs is opportunity cost, or the forgone benefit that would have been obtained from the next best alternative. This is not easy to calculate in every instance but I recommend trying this real estate ROI calculator. It’s a simple calculator that shows the expected return on investment (ROI) from your second home over the life of the mortgage and, for comparison purposes, the ROI should you instead choose to invest in the stock market over that same period. A little later on I will explore my own expected ROI from my vacation rental property and compare it against a stock market investment. In the meantime, let’s move on.  

Second Home Maintenance

As I’ve already covered off the principal costs associated with owning a second home, I won’t explore maintenance costs any further. I will, however, provide the following insight into second home maintenance generally:

• Less may be more. The more stuff you have in your home, the more that can go wrong. While AC units and hot tubs are nice to have, consider whether it’s necessary to have them in your second home. If not, you may be better off without them. 
• Prolonged vacancy. If your home will remain vacant for long periods, consider hiring someone to check on the property. In fact, you may not have insurance coverage if your home is left empty for 30 or 60 days, depending on the policy. By having someone check on your property every 30 days, you can typically satisfy the minimum requirements under your insurance policy. 
• Install a security system with remote monitoring. Consider installing a security system with remote monitoring to reduce risk of vandalism or theft. With smart video cameras, you also have the ability to keep tabs on your property in case of unexpected events such as a flood caused by bursting pipes or an electrical fire. 
• Winterizing. Simple steps to winterize your property will keep the cold out, the heat in and your energy bill down. Steps like flushing the water heater, adding window insulation film and adding draft guards under doors will all help and with only minor expense.   
• Storm proofing. If your second home is in an area that is prone to storms, you will save yourself a lot of headache by storm-proofing the house as much as possible. Adding storm shutters, trimming trees away from the house and removing clutter from around the yard are simple things you can do. Larger projects, such as structural upgrades, may be necessary and will require hiring qualified help.

Second Home Tax Considerations

First, a word of caution. Tax rules are complex and everyone’s circumstances are different. Accordingly, you should consult a qualified tax adviser in connection with your own tax planning. 

As you consider buying a second home, it’s important to understand the tax consequences of ownership. The two most significant tax implications of ownership are typically (i) taxation of revenue derived from your property and (ii) taxation upon the sale of your property. Let’s take a closer look at each.

Taxation of Rental Income

In both the United States and Canada, the IRS and CRA, respectively, will have an interest in any commercial activities associated with the property and, in particular, rental income. Thus, you will need to give adequate consideration to the tax consequences of renting out your second home.

In the United States, if you rent out your property for 15 days or more, then the IRS may view your property as a rental property. As a result, you will be required to report any rental income and pay appropriate tax. One of the benefits of operating a rental property, however, is that you can deduct various expenses, including property taxes, insurance premiums, condo fees, utilities, mortgage interest and depreciation. These deductions can then be used to offset a portion of the rental income, thus reducing your tax burden. Note, however, that if you also use your rental property as a residence, limitations may apply to the expenses you can deduct. According to the IRS, you’re considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of: (i) 14 days, or (ii) 10% of the total days you rent it to others at a fair rental price. An accountant with experience in this area will be able to advise you as to which expenses you can deduct based on your individual circumstances.

In Canada, if you rent out your property then you will similarly be required to report any rental income and pay tax on it. As an owner of a short-term vacation rental property, an important threshold to 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. Keep in mind that, similar to the US, you’re also able to deduct appropriate expenses from any rental income to reduce your tax burden. 

Whether you’re located in the US or Canada, be sure to retain accurate records of the rental income you’ve received and all of the expenses claimed on your tax return in case you’re ever audited. The retention period is three years in the US and six years in Canada.  

Taxation Upon the Sale of Your Second Home

In the United States, if you have held your second home for more than one year, any profit on the sale will be taxed as long-term capital gains. Notably, tax rates for long-term capital gains are more favorable at 15% or 20% (to the extent that your taxable income exceeds the thresholds set for the 15% rate). Prior to selling your second home, you may want to consider the taxable exclusion of $250,000 ($500,000 if married filing jointly) in gains from sales of a primary residence. To qualify, you would need to treat your second home as a primary residence for at least two of the last five years prior to selling. Note, however, that a reduction is made on a pro rata basis to reflect the period of rental, vacation home or other “non-qualifying use”. Also, keep in mind the IRS’ rules on depreciation recapture tax upon the sale of a rental property. This occurs as a result of a taxpayer deducting the depreciation of a rental property from the taxpayer’s ordinary income. The taxpayer has to report any gain from the disposal of the rental property (up to the recomputed basis) as ordinary income.

In Canada, when you sell your second home any gain will be subject to taxation. This differs from the gain realized from the sale of your primary residence, which is tax-free. If you have not claimed any depreciation expense (or “capital cost allowance”), you will realize a capital gain or loss on the sale. If the sale price is more than your cost, one-half of the capital gain is included in your taxable income. If you claimed capital cost allowance, then selling the property may result in a recapture of your capital cost allowance. When you change your principal residence to a second home or rental property (or change your second home/rental property to your principal residence), it’s called a change in use for tax purposes and the CRA may treat it as if you sold the property. For a principal residence, you don’t have to pay tax on any capital gain up to the point of conversion to a second home. For a second home, any gain accruing up to the point of conversion to a principal residence is taxable. Lastly, if you’re collecting GST/HST as an operator of a short-term rental property, you are required to collect GST/HST on the sale of your property.

Pros and Cons of Owning a Second Home

Any discussion about buying a second home would not be complete without considering the pros and cons of owning a second home. With this in mind, here is my list of the pros and cons of owning a second home:

Pros

• Relatively secure investment. Real estate prices in the United States and Canada tend to go up over time and have not experienced the same volatility as other asset classes. 
• Additional ways to increase ROI. By owning a vacation home, you have the ability to maximize your return on investment through home renovations and/or rental income when the home is not in use (but be mindful of the tax implications).
• Borrowing is cheap. Given the low interest rate environment, borrowing money to buy a second home is cheap (assuming you meet the stricter lending criteria). Because of this, you can build wealth using the bank’s ‘cheap’ money.
• Hosting friends and family. Owning a vacation home is a great way to bring family and friends together as there will be no shortage of visitors.
• Retirement. What better way to plan for retirement than owning a second home as an eventual retirement home?
• Pride of ownership. Speaking from personal experience, one of the best things about owning a vacation home is the joy it brings. Quite frankly, this is often the biggest reason to buy a vacation home.

Cons

• Real estate historically outperformed by stock market. If you’re buying a second home for investment purposes, it’s worth noting that real estate in the United States and Canada has historically been outperformed by the stock market. 
• Lack of diversification. Spending further money on real estate may be risky, especially if you’re not well diversified in other asset classes. 
• Ownership isn’t passive. Unlike owning stocks, owning a second home isn’t passive as it will require ongoing time and commitment, from paying annual property taxes to renewing your insurance.  
• Ownership costs. The expenses can pile up pretty quickly as your second home will require ongoing repairs and maintenance.
• Usage may be less than you expect. This will certainly vary from owner to owner but you may find that you don’t actually use your property as much as you expect. I have historically only used my property roughly two weeks a year but then again I’m also operating a vacation rental property. 
• Vacation home moochers. While hosting friends and family is one of the benefits of owning a vacation home, you may also have to deal with freeloaders looking for a free stay.

Is Buying a Second Home Worth it?

With the above in mind, is buying a second home worth it? As mentioned previously, this real estate ROI calculator enables you to directly compare how a real estate investment will perform (with or without rental income) against a stock market investment. Let’s consider some return on investment scenarios using my own example:

• Vacation home purchase price: $715,000
• Down payment: $143,000
• Mortgage terms: 3.61% interest rate with a 25 year amortization schedule
• Monthly rental income: $5,000
• Aggregate monthly expenses: $2,000

Based on the above assumptions, the real estate ROI calculator shows that I’m netting an extra $102.58 per month in rental income, which would not be available if I instead chose to invest in the stock market. Therefore, I need to compare the value of my vacation home plus $102.58 in monthly rental income after 25 years against investing $143,000 (i.e. the size of the down payment) in the stock market over that same period with no additional contributions. Here’s what it shows under the following scenarios:

Scenario 1: Vacation Home Appreciates 4% Annually and Stock Market Grows 8% Annually

• Value of vacation home (and net rental income) at end of term: $1,971,116.09
• Value of stock market investment at end of term: $1,049,645.16

Scenario 2: Vacation Home Appreciates 4% Annually and Stock Market Grows 6% Annually

• Value of vacation home (and net rental income) at end of term: $1,971,116.09
• Value of stock market investment at end of term: $638,490.68

Scenario 3: Vacation Home Appreciates 2% Annually and Stock Market Grows 8% Annually

• Value of vacation home (and net rental income) at end of term: $1,209,119.17
• Value of stock market investment at end of term: $1,049,645.16

As you can see, I’m better off buying a second home in each of the above scenarios. Of course, the above doesn’t take into account appropriate tax planning strategies. For instance, by utilizing a tax sheltered account such as a 401K plan in the United States or RRSP/TFSA account in Canada, you may be able to shelter some or all of the tax burden of a stock market investment. All of the sudden investing in the stock market doesn’t look so bad, especially if you can’t claim a primary residence tax exemption under the vacation home scenario. The other difficulty is that not all of the benefits or drawbacks of buying a second home can be objectively measured. After all, you can’t put a price on the time spent with the kids (or grandkids) and the lifelong memories that result. On the flip side, it’s hard to quantify or value the additional time spent maintaining your property. Personally, I’m very happy with my vacation home. From the revenue it generates as a vacation rental to the joy it brings me and my family, I expect to hold onto it for many years, and ski trips, to come. 

With that, I encourage you to consider each of the items noted above in this article before buying a second home. This is certainly everything I wish I knew before buying my vacation home.

About the Author

Peter is a father, entrepreneur and real estate investor. Together with his wife, he owns and operates a vacation rental property in Whistler, BC and is eager to pass along his knowledge and personal experience.

The post Buying a Second Home: Everything You Need to Know Beforehand appeared first on Vacation Property Online.

Before you buy a lakefront property, consider its proximity and access to water. Lakefront sounds great, but you need to understand what that truly means. Is the water easily accessed through a private beach or dock? Is it easy to get to the water or is the area too steep? Is the area filled with swamp vegetation making it a less desirable area?

Answering these questions and considering the pros and cons of owning a lake house can help you choose the right property for you and your family.

Pros of Owning Lakefront Property

First, let’s look at the benefits of owning a lake house, including the investment potential, various activities that await, the views and quality time with friends and family. 

Lakefront properties are a strong investment

Waterfront properties typically hold high demand, which means they hold their value. If you’re investing for even a little while, you can typically expect appreciation in the value of the home and therefore profit. If you hold onto the property long-term, you’ll realize even greater returns. Additionally, if you are considering turning your lake house into a vacation rental, lakefront properties often command high rents.  

There are plenty of activities

If you’re looking for an investment that’s also a pleasure for you and your family to enjoy, nothing compares to owning lakefront property. You are steps away from activities including swimming, jet skiing, wakeboarding, boating, fishing, and swimming.

Lakefront properties have incredible views

Nothing compares to a lakefront view from waking up to a beautiful sunrise to enjoying the beautiful sunset at night, there’s nothing more relaxing and enjoyable than the views lakefront homes enjoy. This is one of the largest benefits of owning a lake house that many people don’t realize until they experience it first hand.

In addition, you don’t have to worry about new developments, homes or retail buildings taking over your view – the water is your only view and it’s not going anywhere.

Lakefront property attracts family and friends

Another one of the largest benefits of owning a lake house is the ability to entertain friends and family. You don’t have to worry about where you’ll meet nor deal with the usual stresses of organizing family getaways with multiple moving factors. Instead, you have the place and all that’s needed are the invites.

Cons of Owning Lakefront Property

Knowing both sides of the pros and cons of owning a lake house is important. The cons aren’t meant to deter you from the investment, but to open your eyes to the risks they involve.

The cost can be prohibitive

Lakefront properties typically cost more than non-lakefront properties because of the desirability of the homes and the lower supply. For example, as of the date of this post, you can buy a 3 bedroom, 2 bathrooms, 1,100 square foot home on a 5,227 square foot lot close to the water for $800,888 on Lakeview Ave, South Lake Tahoe, CA. But a waterfront home on the same street costs US$1,295,000 for a 2-bedroom, 1.5 bathrooms, 1,440 square foot home on a 5,009 square foot lot. That’s a 61% difference just for the lakefront property. Similarly, in Port Carling of the Muskoka region, you can buy a 3-bedroom, 2-bathroom, 1,400 square foot home on 14.5 acres close to the water for C$749,000. Not far away, is a vacant 7.14 acre waterfront lot for C$1,995,000. That’s a difference of over +37.5% and without a house!

Friends and family can expect use of the property

Owning lakefront property also means friends and family will expect to use it. They’ll not only ask to use it for a weekend getaway but also things like hosting weddings or other celebrations. You may find yourself dealing with ‘freeloaders’ and it could strain your relationships.

Lakefront properties require a lot of maintenance

Just like any home, lakefront properties require a lot of upkeep and it can cost much more not only because of its location, but the unique issues lakefront properties have including:

• Humidity resulting in mold – Mold can be devastating to a home’s structure and livability. It can cause health problems among you and your family members and can cause rust and rot throughout the home.
• High winds – Excessive winds in open areas can cause structural damage that can be costly to repair.
• Falling trees – Falling trees are another large risk in wide open areas, putting your home, cars, and even lives at risk.
• Floods – Since the property is located close to the water, the risk of flooding is high. Not only must you carry flood insurance, but there may be out-of-pocket expenses that are not covered.

Higher insurance costs

Home insurance on a vacation property is usually much higher than a primary residence because of the risk of vandalism and theft while it’s vacant, not to mention general maintenance issues arising when you’re not there.

Investing in a security system with remote monitoring can help reduce the risk of serious issues occurring in your absence and may help lower your insurance premiums.

Insurance costs are typically higher if you’ll use the property as a rental too. It’s important to talk to your home insurance representative to see what discounts you’d be eligible for, especially if you bundle your primary home and lakefront property home insurance together.

Mosquitos could be an issue

Mosquitos are a larger nuisance around bodies of water. They can be annoying and even cause health issues if the mosquitos in the area are carrying diseases.

To reduce the risk consider installing fans in most rooms in your lakefront home and even using fans outdoors to make it harder for mosquitos to fly in the premises of your home. Also, remove any standing water right next to your property, and make sure all screens and windows are properly fit so there aren’t tiny holes for the mosquitos to enter.

Excessive regulations on what you can do with your property

Most areas have additional regulations on what you can do with your property including the home itself and the dock. The state of Michigan, for example, has natural features setback ordinances you must follow to protect Michigan’s lakes. Setback ordinances may include restrictions on construction, earth-moving activities, storage of materials and tree, shrub, groundcover removal or mowing. In most areas in the United States and Canada, you’ll also need approval from other government departments including the U.S. Army Corps of Engineers and Department of Fisheries and Oceans (in Canada) for work in and around the water.

Final Thoughts

Owning lakefront property can be exciting, but make sure you understand the good and bad sides of it. Just because a property is on the lakefront doesn’t make it amazing automatically. Know its structure, the layout by the water, and the risks of owning the property to make sure it fits in your budget and is a sound investment that you and your family can enjoy for many years.

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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.

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Owning a weekend home is an attractive proposition for many. Having the ability to leave at a moments notice to the country to enjoy some much deserved rest and relaxation may be reason enough. Or perhaps its the prospect of hosting friends and family at a place to call your own that attracts you. Perhaps even retirement planning enters the picture when buying a weekend home. Whatever the case, there are many legitimate reasons why it may be a good idea to buy a weekend home.

Before signing on the dotted line, however, there are certain items that you should consider beforehand given the magnitude of such a decision. In this article we explore the top 5 things to consider before buying a weekend home.    

(1) Is it Worth it (Costs vs. Benefits)

Its important to make a fully-informed decision and what better way to do so than by completing a cost-benefit analysis.

Will the prospect of regular weekend use of your new home and pride of ownership outweigh the costs of owning a weekend home? In particular, how much can you reasonably expect to use the property? Assuming the best case scenario, would it still make more financial sense to rent versus own a place in your desired area?

As a starting point, calculate carrying costs assuming a 10, 20 or 30 year ownership horizon. Now calculate the costs of renting in your desired location over the same period and see where you end up. For illustrative purposes, let’s assume the following:

• You are considering purchasing a 1,500 square foot cabin for $250,000, with 20% down on a 30 year mortgage and 4% interest rate.
• You plan on using the cabin for 30 days a year and comparable cabins can be rented for $200/night.
• Instead of buying a weekend home, you could invest the 20% down payment ($50,000) in the stock market for 30 years and expect a 6% return

The calculation would look something like this (without accounting for inflation):

Scenario #1: Buying a weekend home

• Initial down payment: $50,000
• Total mortgage payments over 30 years ($954.83 monthly): $343,739.01
• Total costs over 30 years (repairs, insurance, property taxes, etc. assuming annual 2% of the home value in maintenance costs and 2% in major repairs): $300,000
• Total value of cabin after 30 years (assuming 3.4% annual appreciation): $681,641.73
• Net gain/loss after 30 years: –$12,097.28

Scenario #2: Regularly renting a weekend home

• Total rental payments over 30 years ($6,000/yr):  $180,000
• Initial investment: $50,000
• Total value of original $50,000 investment in stock market after 30 years (assuming 6% annual return): $287,174.56
• Net gain/loss after 30 years: +$57,174.56

In the above scenario, it doesn’t appear to make financial sense to buy. Yet, if the cabin appreciates even 0.5% more annually, the result is another $100,000 in equity after 30 years. While its difficult to forecast such amounts with any degree of certainty, the above example should still serve as a useful guide in understanding the financial implications of owning a weekend home.

Regardless of whether or not it makes more economic sense to rent vs own, does ownership fit into your overall financial picture?

Owning a weekend home can have significant implications on your long-term finances. Talk to your financial planner to see if you can afford to buy a second home. For instance, purchasing a weekend home close to retirement may make sense especially with cash in the bank and a full pension on the horizon. It may similarly make sense for a younger couple to buy a vacation home in their prime earning years so that they can service the mortgage payments.  On the other hand, buying a weekend home before completing much needed renovations on your primary residence may not make the most sense. Ultimately there is no “one size fits all” approach and therefore its important to understand the overall financial implications of buying a weekend home. 

While owning a weekend home may be a good investment over the long term, the decision to buy is often made for other reasons. In particular, its important to acknowledge that the decision to buy a weekend home is often driven by an emotional desire to own. After all, can you really put a price on family memories at the cabin or the ability to recharge at the beach house at a moments notice? For some, these may be reasons enough to justify purchasing a weekend home. For most, however, financial considerations will also weigh heavily in the decision making process. 

The results of a cost-benefit analysis will undoubtedly be anything but black and white. By conducting such an analysis, however, it will help you better understand whether owning a weekend home is right for you.

(2) Consider the purpose of buying a weekend home

What is your motivation for buying a weekend home? If you’re buying primarily for investment purposes then you will have a different set of criteria from someone looking to buy as a place to eventually retire.

Similarly, if you’ve always dreamed of owning a second home to pass down to your children then you may not be overly concerned with the financial implications of ownership. If you are a true “weekend warrior” and plan on using your second home on weekends-only then you will yet again have different criteria to consider.

For those weekend-only users, perhaps a turn-key property is the best choice. Otherwise, it may not be worth the time spent fixing and maintaining your property relative to the amount of time you will actually use it. Further, if you will be primarily using it as a place for rest and relaxation, then perhaps a more rural setting away from the city will better suit you. If you’re an outdoor enthusiast then somewhere close to the beach, river, hiking trails or mountains would be obvious choices. Ultimately, in order to get full value out of a weekend home, as with any vacation property, you should ensure that it ticks all of the boxes, including location, facilities and amenities. 

(3 ) Consider distance, travel time and accessibility

Given that you will be only using your weekend home for short stays, travel time, distance and accessibility will all be important considerations. Ideally you will want a weekend home that is no more than 2 to 3 hours away, which rules out airline travel. Similarly, any time spent waiting at border crossings, ferry terminals or train stations will need to be taken into account.

Part of the draw of owning a weekend home is being able to leave at a moment’s notice and that may not be possible if you are reliant upon transportation methods that require advance planning. 

From an accessibility standpoint, are access roads, ferry services or other transportation methods available year-round? If not then you likely won’t be able to use the property for extended periods of time.   

For borrowers in the United States, keep in mind that a vacation home must typically be located at least 50 miles away from your primary residence in order to enjoy the “second home” classification that is coupled with a lower interest rate. For borrowers in Canada, similar considerations need to be taken into account. For a more detailed overview of these requirements, click here.

(4) Consider the local climate and seasonality

Its important to take into account any seasonal limitations when purchasing a weekend home. Owning a weekend home with year-round use will certainly be more attractive to ensure that you maximize use. On the other hand, owning a seasonal property that is only accessible during the summer months may be more difficult to justify, especially if you are typically on vacation elsewhere during such period thereby limiting the amount you can use your weekend home even further. 

You will also need to consider the required maintenance on the property as a result of local weather patterns. A ski chalet nestled in the mountains will require regular snow removal and upkeep. Similarly, an oceanfront house located in a jurisdiction prone to hurricanes will require regular care and maintenance, often at a moments notice. If your weekend home will remain empty for extended periods then appropriate arrangements will also need to be made to ensure that the property is maintained in your absence. 

(5) Will you be renting it out part time? 

If you are planning on renting out your weekend home part-time, keep in mind that weekends typically command the highest prices for short-term rentals. Further, there may be minimal demand for weekday rentals. Do your research ahead of time to get a better understanding of rental demand in the area. If you plan on using the home most weekends during peak season then you may not be able to rely upon much rental income during shoulder season. Alternatively, perhaps there is healthy demand locally for monthly rentals during the slow season which will help offset carrying costs.

Other things to keep in mind before renting out your weekend home include:

• Increased risk profile from lender’s perspective. 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. 
• Increased borrowing capacity. Depending upon the lender, they may give you credit for up to 80% of the projected fair market rents. 
• Tax implications. In the United States, the IRS uses specific thresholds to distinguish between a vacation home that is rented out part time and an investment property. In Canada, renting a vacation property more than occasionally could trigger a “change in use” of that property for income tax purposes. For a more detailed overview of these rules, click here. 

Quick hits: other items to consider

• Be sure to stay in the area before buying to ensure you enjoy the surrounding area.
• Having secure storage available at your weekend home will be useful if you want to avoid packing, and transporting, all of your gear every weekend.
• Similarly, having in-suite laundry will be useful if you want to avoid packing linens, towels etc.
• Is cell phone and internet service available? For some people, staying connected on weekends will be important whereas others may wish to completely disconnect. 

Is owning a weekend home right for you?

If you set realistic expectations regarding the costs and benefits of owning a weekend home, then buying a weekend home may be right for you. Its unavoidable that part of the decision will be an emotional one, which heightens the importance of fully-understanding the financial implications of owning a weekend home as well as the amount of time you can reasonably expect to use and enjoy the property. With proper consideration and planning, owning a weekend home can be a rewarding experience, both financially and from an overall enjoyment perspective.  

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In this article, we explore the top reasons to buy a vacation home, including:

1. Owning the perfect getaway
2. Investment purposes
3. Creating family memories
4. Retirement planning

With these reasons in mind, buying a vacation home may just be a good idea

The Perfect Getaway

The first, and likely most obvious reason to buy a vacation home, is that you will have place to spend your vacations.

By purchasing a vacation home, it will take the guesswork out of your vacation destination. Importantly, you will be able to vacation comfortably in your “home away from home”, all the while taking pride in ownership. Owning a vacation home may also afford you the opportunity to take advantage of seasonal temperature changes by following the seasons.  Specifically, you may be able live in your primary residence for most of the year while spending your summer or winter months in your vacation home. In short, you can purchase your own perfect getaway.

Investment Purposes

Whether purchasing a vacation property makes economic sense will depend on a number of criteria, including the property to be purchased and your own personal financial situation. There are, however, several reasons why vacation homes make great investments.

For instance, real estate in both the United States and Canada have seen historically strong returns on investment. And while the real estate market can be volatile over the short term, it is a relatively stable investment over the long term. You also have the opportunity to earn passive income by renting out your vacation home when its not in use. If you buy in a prime tourist destination, your home will be able to command fantastic rental rates. Importantly, you can build wealth with the bank’s money. Given current interest rates, the money earned from your vacation home, if done right, will often exceed the underlying mortgage costs.

Be sure to try our vacation property investment calculator to determine your potential return on investment should you choose to buy a vacation home.

Family Ties

Owning a vacation home is a great way to bring family and friends together. By having a place to return to year after year, you and your loved ones will have the perfect place to create lasting memories.

Strong family bonds are an important element of any individual’s well-being and what better way to strengthen these bonds than annual trips to the family cottage. Further, with appropriate planning, you can arrange to have the home passed down to your children and hopefully one day their children. While purchasing a vacation home represents a big financial commitment, you certainly can’t put a price on creating lasting memories and ultimately the legacy that is passed on to your children.

Retirement Planning

A vacation home represents an excellent try-before-you-buy investment for an area in which you are interested in retiring.

By purchasing a vacation home now, you can get a taste of living in that area. Do you like the region generally and the neighborhood more specifically? Can you picture yourself living there in your retirement years? Many times people elect to take the plunge and move to a place when they retire only to regret it later on. For instance, the vacation destination may have appropriate infrastructure and amenities for young families but be lacking adequate support for seniors. By spending time in the area over the years, you will get a better sense of its advantages as well as its limitations.

Additionally, If you pay off your mortgage by the time you retire, your vacation home can help fund your retirement dreams. For instance, you could sell your primary residence, use that as your nest egg, and then make your vacation home your primary residence. Or you could choose to keep both properties and earn rental income from one or both of them. In short, the equity you have built up over the years on your vacation home affords you more financial flexibility in retirement.

We hope you have enjoyed this article on the top reasons to buy a vacation home. Be sure to explore other articles on buying a vacation home.

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Buying a vacation home represents a big decision and requires thoughtful preparation and planning. After all, a substantial amount of time and resources will be required to complete the purchase and ultimately maintain the property. Further complicating things is the fact that purchasing a vacation or recreational property may be grounded in emotions as opposed to rationality. For many, purchasing a vacation home is the realization of a dream and because of this its sometimes difficult to view such a purchase with an objective frame of mind. Yet with careful planning and fiscal responsibility, purchasing a vacation home can be a rewarding experience. With this goal in mind, we’ve prepared a list of the top eight mistakes to avoid when buying a vacation home and, more importantly, what to know before buying a vacation home. 

Mistake #8: Buying a Vacation Rental Property Without  Adequate Due Diligence

Business is booming in the vacation rental industry. Thanks to platforms such as Airbnb, VRBO and Booking.com, owners of vacation properties have access to thousands of vacationers eager for more intimate experiences.

Without completing adequate due diligence, however, owning a vacation rental property could become a challenging experience. Some of the questions you will need to consider include:

• How much money can you expect to bring in weekly, monthly and yearly?
• Is demand seasonal?
• How will the use of the property impact your tax status, mortgage, insurance and other related items?
• Are there short term rental regulations in place in the area? For strata properties, due the bylaws permit short term rentals?
• Who will manage the property?
• Are support services such as cleaning and repairs available?

These are only some of the questions that need to be considered. The good news is that, with a little upfront work, it is completely feasible to purchase a vacation rental property and thrive as many others have done.

Mistake #7: Completing a Purchase Without Adequate Tax Planning

At number seven in our list of mistakes to avoid when purchasing a vacation home is the often overlooked step of completing adequate tax planning.

The tax consequences of owning a vacation home are complex. Accordingly, appropriate advice should be sought before purchasing a vacation home.

Importantly, there may be certain steps that can be taken in advance that would otherwise be impossible to implement following completion of sale. For instance, are there different ownership structures that may provide benefits from a tax perspective? Is there an opportunity to take advantage of capital gains tax treatment for primary residences? If you will be renting out the property, do you need to complete additional tax filings and registrations? Taking the time to speak with an accountant familiar with these rules can help avoid headaches later down the road.

Mistake #6: Buying a Timeshare Without Reading the Fine Print

Its no secret that many vacationers have been taken advantage of by pushy sales people looking to sell timeshares to unsuspecting tourists. What seems like a great idea while riding that “vacation high” may turn into a feeling of regret.

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, its important to read the fine print to better understand your usage rights, annual fees and other obligations. While timeshares are more affordable than outright ownership, the costs can add up over time and they are notoriously hard to sell. For these reasons and more, be sure to take your time to fully-understand what you’re signing-up for before completing a purchase.

Mistake #5: Buying a Vacation Home That is Too Far Away

At number five in our list of mistakes to avoid when purchasing a vacation home is the mistake of buying a vacation home that is too far away.

Above all else, a vacation home is a place for recreation and pleasure. Any time spent travelling will take away from your leisure time.

For this reason, you will need to consider the travel time between your primary residence and vacation home. So how far away should a vacation home be? Consider purchasing a property no more than 2 to 3 hours away if your vacation home will be used for trips of 1 to 2 days and avoid travelling more than 5 hours unless your vacation home will be used for trips of 7 days or more.

Mistake #4: Buying with Friends and Family Without Ironing out the Details

Buying a vacation property with friends, family or other loved ones can often seem like a great idea. Not only will your dollar go further by pooling savings together, but you will also get to share your property with loved ones. Important questions, however, need to be asked in advance in order to minimize the risk of conflict. Such questions may include:

• What purpose will the vacation home serve? For instance, will use of the property be reserved for family only?
• How is access to the property determined? Allocating a fair and equitable schedule annually can often be a challenge.
• How long is everyone’s ownership horizon? What happens if someone wants to sell before others are ready to do so?
• Who will maintain the property?
• How will title to the property be held and what happens upon the death of an owner?
• How will you decide the timing, scope and cost allocation of any necessary renovations?

These are only some of the questions that need to be asked and, for obvious reasons, its important to deal with them before jumping in.

Mistake #3: Buying Before You Visit the Area

Before buying a vacation home, be sure to visit the desired area first. Does the city or town have the desired amenities and infrastructure? Is the location safe and are the locals welcoming to tourists? By spending some time in the area you will have a better sense of whether you can see yourself returning year after year.

Mistake #2: Buying While on Vacation

At number two in our list of mistakes to avoid when purchasing a vacation home is the mistake of buying a vacation home while on vacation. While it may seem like a good idea at the time, this may prove to be incorrect when reality sets in. Given all of the elements at play, whether it be sensory overload or other stimulus leading to a relaxed frame of mind, you are far more likely to make an emotional purchasing decision. And while it is important to spend some time in the vacation destination before purchasing a home in the area, be sure to take your time before completing a purchase. Often this means waiting until you return home with a clear frame of mind. The last thing you want to do is rush such an important decision by purchasing a property while riding that “vacation high” (see Mistake #6: Buying a Timeshare Without Reading the Fine Print).

Mistake #1: Spending More Than You Can Afford

The biggest mistake that people often make is spending more than they can afford on a vacation property.

Many factors need to be taken into account to determine how much vacation home you can afford. This may include the size of your down payment, your debt to income ratio and any rental income from the property. In terms of your total debt to income ratio (i.e. total expenses over total income), most financial experts recommend keeping it at a rate of 30% or less for home expenses. Rental income will certainly increase your borrowing power as will a sizable down payment, whether it be available through a home-equity line of credit, investments or other savings.  Importantly, crunch the numbers and be sure to avoid over-extending yourself. Owning a vacation home should be a positive experience and the financial stress of owning a vacation home can quickly erode any such positivity.

We hope you’ve enjoyed our top eight mistakes to avoid when buying a vacation home and, ultimately, what to know before buying a vacation home. Thanks for reading!

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When people think about buying a vacation home in the United States or Canada, they often imagine getaways to Maui, Lake Tahoe, Palm Beach, Whistler, Muskoka Lakes, Mont Tremblant and other vacation hotspots. Typically, people are drawn to vacation properties as places to go to relax. While it is undoubtedly true that second homes serve that purpose, they can also make fantastic investments. Typically buying real estate is a wise decision, as property values tend to appreciate over the years. But is a vacation home a good investment relative to other asset classes? With this question in mind, we consider the pros and cons of owning a vacation home as an investment.

Curious about your potential return on investment should you decide to purchase a vacation home? Simply complete the inputs in our vacation property investment calculator to find out more.

The Good

Historically Safe Investment

Like many other industries, real estate is prone to price fluctuations. Yet, by looking at historical home prices in the United States and Canada, it’s clear that real estate offers a fairly safe investment.

In the United States, apart from the housing crash of 2008 (which prices have since recovered) real estate prices have increased consistently since the 1950’s, going from a median home price of US$180,039.29 (inflation adjusted) in 1953 to over US$300,000 in 2021. Canada has also had historically steady growth when it comes to real estate. In fact, Canadian real estate prices have continued to appreciate despite the 2008 housing crash in the United States.

In short, it’s rare to have a complete collapse in prices as historical real estate prices illustrate. Instead, real estate prices have typically shown slow and stable growth over time.

Additional Safety Net

Perhaps one of the reasons why real estate is a relatively safe investment is that the land and structure you own will always be worth something. People will need a place to live and travel. This fact remains true both in a bull market and a bear market. While your vacation home may go down in value, it will never be worthless like other investment types.

Therefore, many people look at property as a relatively safe investment with less downside than other equities. If you are looking for a way to preserve your wealth, real estate is often a stellar way to do this. Of course, there is an added benefit that you get to enjoy your investment while simultaneously knowing that you are using your money wisely. If the worst case scenario happens and there is a complete crash in the real estate market or tourism industry, then at least you can use your vacation home for weekend getaways or family vacations.

Real estate is also unique in that there are relatively well-defined processes for extracting equity out of your home without actually selling the property at comparatively meager interest rates. If you ever find that you need money, unlike stocks and bonds, you can apply for a second mortgage or a home equity line of credit (HELOC) and access your equity for an interest rate that is typically only slightly above inflation. Meanwhile, while you are borrowing that money, your underlying asset – the vacation home – continues to appreciate and can still earn rental income to pay that HELOC back.

Ability to Generate Rental Income

When you are not using your vacation home, you have the option of renting it out. If you buy in a prime tourist destination, your home will be able to command fantastic rental rates. If you hire a property manager to coordinate these rentals for you, then most of the work will be taken care of for you. If you would like to manage things yourself, then there are any number of vacation rental platforms to choose from. 

There are also tax benefits to renting your property out when you are not using it. Expenses you incur while renting it out (e.g. property taxes) can offset rental income. If your annual property tax bill is $2,000 per year, and you rent out your vacation home 80% of the time, then you can write off $1,600 of your taxes against that income.

Of course, tax laws in the United States and Canada are nuanced and varied, so you should consult with a qualified accountant before deciding to rent out your particular vacation home.

Renovations Increase Value

Investing in your vacation home has two benefits. First, it enables you to enjoy it more while you are using it. Second, it increases the value of your vacation property.

Furthermore, if the renovations help to rent the property out or increase the amount of rent you can charge, you might be able to deduct those expenses against rental income (again, consult with a tax professional for your particular circumstance).

This point is particularly true if you buy a vacation home at a discount that needs work. As a quick example, suppose that you buy a distressed property for $300,000. Houses of similar size go for $500,000. Now, you put in $50,000 worth of renovations to make it habitable. Over the next five years, you put in another $50,000 to make it pristine. In the meantime, you’re able to enjoy the property and occasionally rent it out for other people to use.

After all those renovations, your home is now worth $600,000 because it is better than all the other homes on the market. You put in $400k between the purchase price and renovations. You were able to rent it out for some passive income during those five years. After all that time, your home is now worth $200k more than you paid for it, netting you $100k in additional equity after the cost of the renovations are taken into account. You got a place to enjoy, some passive income, and still come out ahead financially. If you’re willing to put a little bit of elbow grease into a distressed property, a vacation home can be a great way to make a little bit of money while having a fun and enjoyable place to go.

It Can Help You Achieve Your Savings Goals

If nothing else, owning a vacation home results in forced savings.

A vacation home can act as a delightful savings account. If you sometimes find it challenging to save, buying a vacation home as an investment can help you achieve your savings goals without being a bank account that you can withdraw from effortlessly. For some people, it’s easier mentally to save money by investing in a goal or a dream than it is to sock away cash for the sake of socking away cash. If you fall into that category, a second investment home might help you achieve your savings goals.

Of course, unlike a bank account that might earn 1.5% interest if you are lucky, the capital appreciation on a home has historically been much higher. If you are looking to accelerate your wealth building, having properties besides your principal residence is a fantastic way to achieve that.

Tax-Advantaged Wealth Building

You needn’t rent out your property to see the benefits of investing in a vacation home. Any property appreciation that you achieve is tax-deferred until you sell and is subject to capital gains tax instead of regular income tax. In the United States, capital gains are generally included in taxable income, but are typically taxed at a lower rate. For instance, short-term capital gains are taxed at rates up to 37% and long-term gains are taxed at rates up to 20%. In Canada, you are taxed on 50% of the capital gain, not 100%. If you held a property for ten years that appreciated in value by $100,000, you would owe tax (at the relevant rate) on 50% of that ($50,000). Whether you’re resident in the United States or Canada, you can take advantage of the lower level of taxation on capital gains. 

Of course, if you invest in stocks, bonds, etc. you also get this tax advantage, but those tend to be a little riskier than real estate. Further, if you put that money in relatively safe investments like Certificates of Deposit (in the US) or GICs (in Canada) and savings accounts, then you owe income tax on any interest generated from those accounts immediately once you earn it. With real estate, you don’t realize a gain until you actually sell your vacation home. Therefore you can defer any tax obligation until you decide to sell. Real estate blends the best of all worlds by offering a tax-advantaged way to build wealth while still providing strong returns on investment.

You Can Build Wealth Using the Bank’s Money

One somewhat unique property of owning real estate as an investment tool is that the bank will lend money at relatively inexpensive interest rates to purchase it. This money will then typically earn a higher ROI than the underlying mortgage costs. In effect, buying an investment property enables you to make “free” money.

Consider the following example. Suppose you buy a $500,000 home. You put down 50% or $250,000. The bank puts down the other $250,000 at an interest rate of 3% on a 25 year amortization schedule, and the property appreciates 8% per year. At the end of 5 years, your home will be worth $734,000. Not bad! You’ll also owe $213,000 on the mortgage after paying approximately $71,000 in monthly payments, $37,000 of which went towards the principal. You can sell your property for $734k and pay off the $213,000 balance with the proceeds. You will have $521,000 left after the sale (excluding real estate commissions, taxes and fees). That $521,000 is off of your original $250,000 investment plus the $71,000 in mortgage payments. Therefore, your net profit is $200,000, which is not bad, considering you only put in $321,000! That’s an ROI of over 60% in 5 years.

The reason you were able to have such a substantial return on investment is that you were earning 8% on the full value of the vacation home, while only paying 3% to the bank on half of that value. No other investment has access to “cheap” money quite like this. The margin rates on stocks are quite expensive. Bonds don’t have loans like this either. The only investment with interest rates that hover this low is real estate.

The Bad

Historically Outperformed by Other Investment Types

While past performance is not necessarily indicative of future performance, historical returns are an important consideration for any mindful investor. At the very least, the long term results of different investment types will paint a clearer picture as to what you can reasonably expect over the long term. Given that there are various different competing investments you can make, from stocks and bonds to gold and other precious metals and even crypto currencies, it’s important to do your research before you put your money to work.

Comparing historical real estate returns, however, is not necessarily an apples to oranges comparison with the stock market for instance. For example, real estate returns can vary substantially from city to city so national data may not be completely accurate. Further, with real estate you have the potential to not only earn a return on your investment through price appreciation but also rental income which is not always easy to measure. Finally, real estate purchases are typically highly mortgaged (or leveraged), which can magnify gains. Still, by working with the available data we’re able to see how real estate stacks up against other investments.

In the United States, the long-term nominal (not inflation-adjusted) annualized return from 1928 to 2020 was 4.0% for U.S. real estate. By comparison, US large-cap stocks returned 9.8% over the same period. In Canada, similar data suggests that equities have been a more effective way to grow wealth compared to real estate.  For instance, from 1996 to 2020, house prices in Canada increased on average 5.7% whereas the TSX composite index rose 8.0% over the same period. Of course, none of the data can accurately account for rental income nor the magnified returns when using the bank’s money.

In short, the data suggests that US and Canadian real estate are a relatively poor investment choice as compared to other asset classes. Keep in mind, however, the limitations with this data as further described above.

Not Truly Passive

The reality is that owning a vacation home will require a certain level of active involvement.

If you plan on renting out your vacation home, perhaps as a short term rental, then you’ll need to manage the bookings, collect payments and attend to other matters, although short term rental websites such as Airbnb and VRBO have certainly made this easier. Yet you will still be responsible for the guest experience and have to deal with any issues that arise. Even if you hire a property manager there will still be annual obligations such as paying property taxes, renewing insurance etc. Undoubtedly, unexpected issues will arise such as major repairs or renovations that will require your time and resources. 

By comparison, investing in the stock market is a truly passive investment and, as illustrated above, may outperform real estate in the long run.

Lack of Diversification

Diversification is an important component of any investment strategy. Simply put, rather than risking all of your resources on any single idea, venture, or asset, it’s important to invest in multiple asset classes. For instance, while investing in gold may turn out to be a prudent choice over a five year period, it may turn out to be a bad choice for the next ten years after that. Similarly, the real estate market has periods of strong growth and little to no growth. Look no further than the 2008 financial crisis for a recent example of a period of depressed real estate prices. 

Assuming you own your primary residence, then committing further money to a vacation home may be risky, depending upon how well diversified you are in other asset classes.

Stricter Lending Criteria

Mortgages for vacation homes will often be accompanied by larger down payment requirements, higher interest rates and more stringent lending guidelines.

This is because vacation home mortgages are more risky as owners may be more willing to default on their vacation home mortgage (as opposed to the mortgage on their primary residence) when faced with financial hardship. For example, many lenders will require at least a 640-credit score, and a 20% to 30% down payment on a vacation home. The higher down payment reassures lenders that you’ll make your payments on time. You can also expect to pay mortgage rates that are 0.25% to 0.5% higher than you would for a primary residence

If you can’t satisfy these more stringent lending criteria or the requirements otherwise make the investment uneconomic, then there may be other more attractive investments to make.

Increased Leverage

Assuming you qualify, a second home mortgage will increase your leverage and overall debt to income. While you may be able to handle the monthly payments (with or without rental income), it’s not without risk. For instance, as the COVID pandemic has shown, unforeseen events can seriously impact your finances. Whether it’s loss of income due to career setbacks or loss of rental income due to a downturn in the travel industry, there are many potential events that could adversely affect your finances. Even weather related events could result in your once promising vocational rental sitting idle. 

The point is that with increased leverage comes increased risk. Most financial experts recommend that you have a debt to income ratio of no more 43% overall and 30% on housing expenses. Try to ensure you stay within these limits and, when crunching the numbers on your vacation home, assume the worst. If you can handle the monthly payments in the worst case scenario, then buying a vacation home may just be a good idea.

Vacation Home Freeloaders

If you’re buying your vacation home as an investment then it can often be a challenge for friends and family to accept that they can’t use the property whenever they want, either for free or at a substantially reduced rate. Many people may even feel entitled to use your property. This is where it becomes more difficult as an investor as opposed to someone who simply wants a second home to spend time with friends and family. As an investor, you should be maximizing your investment and looking for new ways to generate revenue or increase your return on investment. Yet some people can’t understand that. With alternative investments such as stocks, you won’t have this issue as your uncle’s second cousin can’t borrow your Amazon shares for the weekend. If you do rent out your property, provide a universal friends and family discount between 10-20% and don’t deviate from it.

Vacation Home as an Investment: So Where Does That Leave Us?

Like any other asset class, investing in real estate has its pros and cons. Historically, home prices in the United States and Canada have shown consistent if not unspectacular returns. Yet you can also extract value through rental income and home renovations all the while using the bank’s money to do so. What really separates buying a vacation home as an investment from other investment types is the dual purposes for which it serves. While a vacation home can make a great investment, there are intangible benefits that can’t be measured. You can’t, for instance, put a price on pride of ownership or memories with the grandkids. The joy that a vacation home can bring is something that other investment types just can’t come close to matching.

Ultimately, if you’re looking to maximize your return with a truly passive investment then perhaps investing in the stock market is more appropriate. However, if you’re willing to assume all of the responsibilities as a vacation homeowner, then you can still enjoy the fantastic returns on investment while you have fun!

No matter what your investment and lifestyle objectives are, buying a vacation home as an investment can often get you there. For more articles and resources on buying a vacation home click here.

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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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