But before buying a vacation property that will be your primary residence, there are several things you should consider first. With this in mind, here’s what you should know.

What to Consider Before Buying a Vacation Property That Will Be Your Primary Residence

Before you buy a second home that will be your primary residence, take the time to consider the following:

Current Needs vs. Future Needs

Consider whether the home will meet your current and future needs. How do you initially plan to use the vacation property? If you will be using it as a vacation rental property, then it will have a different set of considerations from, say, a weekend home. Do you subsequently plan to retire in the home? If so, perhaps a three story property on acreage is not the best choice, even if it would serve as a great family retreat in the meantime. Don’t fall into the trap of focusing on things as they exist today. Instead, consider how the home will meet your needs over the near term as well as the next 10-20 years.

Even if the home doesn’t meet your current or future needs, do you have the ability to renovate it? Since you won’t be living in the home right away, it may be the perfect time for renovations. This could also be a great way to save money by buying a “fixer upper”. And, since 100% of any gain realized upon the sale of a “second home” is taxable in both the US and Canada (more on that later), it may be advantageous from a tax perspective to complete expensive renovations while it is still your second home in order to increase your adjusted cost basis. By increasing your cost basis, it will help reduce any gain realized on a sale and thus your corresponding tax obligation.

Your Circumstances May Change

No matter how much planning you do, your needs and/or circumstances may change. Perhaps your kids live at home longer than expected while they attend university. Or perhaps the opposite is true and your kids move further away to attend university or pursue career opportunities. In the former case, the transition to your second home may be put on hold and in the latter case you may decide that you don’t want to move into your second home altogether. Take the time to ensure you have an exit strategy or a back-up plan in order to deal with a change in circumstances.

Finances

Before buying a vacation property, crunch the numbers to ensure you can afford it. Speak with your financial advisor to determine the suitability of buying a vacation property. As general guidelines, you should expect to come up with at least 20% of the purchase price as a down payment and have a debt-to-income ratio of no more than 43%. Be sure to explore our article on How Much Second Home Can I Afford for more detailed information on affordability criteria.

Assuming you need financing, do you qualify for a second home mortgage? Second home mortgages are harder to qualify for than primary residence mortgages. If you don’t qualify, do you have equity in your primary residence you can cash-out and use to buy the home? Here are a couple of ways to finance a second home using the equity from your primary residence:

• HELOC – A home equity line of credit gives you access to up to 80% of your home’s value minus any outstanding mortgage balances. You can draw from your credit line at any time, and only owe interest on the money withdrawn.
• Second mortgage – You can also take out a second mortgage on your existing home, otherwise known as a home equity mortgage. This loan has a fixed interest rate, and you receive the funds all at once. You’ll then owe principal and interest on the borrowed amount.

Tax Planning

Before making such a significant purchase, speak with a qualified tax professional. After all, decisions you make now may have implications on your tax obligations in the future. While we go into a bit more detail on some of these tax consequences later on, be sure to obtain tax advice both before moving forward with the initial purchase and before converting it into a primary residence.

What to Consider Before Converting a Vacation Property to a Primary Residence

If you already own a vacation property, you should consider the consequences of converting a second home to a primary residence, including:

Mortgage Terms

If you took out a mortgage to buy a vacation property, you may be eligible to refinance it at a lower rate once you live in it full-time. Primary residences have better terms because you’re more likely to pay the mortgage on time and not risk losing your home. You can expect interest rates to be as much as 0.25% – 0.5% higher for second homes. As such, speak with your lender and be sure to take advantage of lower rates for primary residences (if not at the time you convert your second home to a primary residence then when your mortgage is up for renewal).

Don’t forget to consider the mortgage terms of your first mortgage as well. If you’ll be selling your primary residence, ensure the mortgage on that property doesn’t have a prepayment penalty or that you can port it to your second home.

Look at the big picture and determine how you can structure your home financing so that it costs you the least amount of money.

Home Insurance

When you switch your vacation property to a primary residence, you may also save money on home insurance. Just like a mortgage lender thinks a second home is riskier, so does your insurance company.

When you convert your vacation property to a primary residence, your insurance costs will decrease. Talk to your insurance agent about the differences so you know what to expect.

Tax Consequences

Whether you’re in the United States or Canada, there are tax consequences when converting a “second home” to a primary residence. Here’s a summary of things to consider.

Note that 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.

United States

• You may get a capital gains exception on the money earned on the sale of your primary residence. The amount you can exempt depends on if you are single ($250,000) or married filing jointly ($500,000).
• If you sell your second home, any capital gains will be taxed as long-term capital gains if you have it for at least one year. The tax rates are 15% or 20% depending on your taxable income. This gives you a “way out” if you decide to sell your second home before moving in full time, albeit with a tax hit on any capital gains.
• When converting your second home to a primary residence, you can get the capital gains exclusion as long as you live in the home as your primary residence for at least two of the last five years. The capital gains exclusion is on a prorated basis, however, depending on how much of the time you owned the second home as a vacation home or other “non-qualifying use”. For example, if you have been living in it full-time for two years after using it for five years as a vacation home, your prorated exclusion limit will equal 2/7 (i.e. 2 years of full-time use over a 7 year period) of the gains. So instead of taking advantage of the full $250,000 exemption, it would be reduced to $71,430 (2/7 x $250,000) to reflect the period during which the property was used as a primary residence.

Canada

• When you sell your second home in Canada, all gains are subject to taxation. This isn’t the case for your primary residence, however. Those capital gains are tax-free.
• If you sell a second home for more than you bought it for, half of the capital gains are included in your taxable income.
• When you convert a second home to a primary residence, the CRA treats it as if you sold the home. This is called a “change in use“.
• If you convert a primary home to a second home, you don’t have to pay capital gains tax up to the point of conversion.
• If you convert a second home to a primary residence, you’ll pay capital gains tax on any gain up to the point you converted it. So if your second home has appreciated $50,000 by the time you move in, half that amount, or $25,000, will be subject to taxation.

Final Thoughts

Before buying a vacation property or “second home” that will be your primary residence, consider the transition carefully. Think of not only how well the home will suit you and your family, but also the financial consequences of the change. In many cases, it can be a strong move financially, but understanding how it works, what it will cost you, and how it will affect your taxes is important before deciding to convert your vacation property to a primary residence.

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Can You Live on Recreational Land

If you own recreational land or are thinking about purchasing it, you may be asking yourself:

• Can you live on recreational property?
• Can you live year-round on recreational property?
• How long can you live on recreational land?

The answer is that it depends. Most localities in the United States and Canada have restrictions on using recreational zoned land for residential purposes, including restrictions on building permanent structures on it. Before you buy recreational land, it’s important to complete your due diligence to determine whether you can live on it for all, or a portion of, the year.

For a more detailed overview of the what recreational property is, explore our article: What is Recreational Property? An Overview of Recreational Property Meaning. 

Zoning Considerations

Understanding Land-Use Regulations and Zoning

All real estate in the United States is regulated through land use regulations and zoning laws. This is similar in Canada, where land-use control is a provincial responsibility. Cities and municipalities have zoning laws or regulations on how the land can be used. The zoning laws determine how the land can be developed and its intended purpose. Recreational zoning typically means you can’t build a permanent structure on the land. Each area, however, will have different meanings for the term. Overall it often means you can’t live there permanently. In some cases, you can’t even park a camper or “mobile home” on the property for an extended period.

A good example of such restrictions is an area zoned “forest recreational” in the Northern Region of Lower Michigan. In this particular area you’re allowed to have a 500 square foot hunting or fishing cabin on the land. You also can’t stay in the cabin for more than 120 days a year. If you have a mobile home/RV, it cannot be on the property for more than 120 days either. As you can see, you’re permitted to build a permanent structure but not for the purposes of residing there permanently.

Keep in mind, every area and municipality will have different definitions for the term recreational zoning. Read the fine print, ask questions, and work with the professionals before buying land to determine if it will suit your needs. More specifically:

1. Talk to the local zoning department; and
2. Get a copy of the zoning ordinances of the zoning board to understand each zoning classification. Building and use restrictions will be precisely defined by the ordinances of the zoning board.

Don’t buy land assuming you can do what you want with it, only to find out the hard way later. Always ask the question: can you live on recreational land in my area and speak with the zoning department to know what you’re up against.

Can You Rezone Recreational Land?

What if you find the perfect plot of recreational land but you’re unable to build a permanent structure on it? Or perhaps you can build a structure on it but can’t otherwise reside on it permanently? Can you rezone recreational land? It is in fact possible to do so. This can be achieved through a zoning variance, special use permit or a change in the zoning designation:

• Special use permit. Simply put, this allows you to use the land in a way not normally permitted and, in many cases, will expire upon a sale of the land.
• Zoning variance. Essentially grants you permission to use the land in a way that is in violation of the local zoning. But note that you will often have to show some form of hardship is created due to special circumstances.
• Rezoning. This can be a long and expensive process as existing zoning restrictions will take into account the best use of land for all people in the area. Thus, any changes will be subject to increased scrutiny from the relevant governing body.

The process for obtaining a zoning exception will vary based on the jurisdiction. But be prepared to submit a written application, provide a filing fee and plead your case to the local zoning board or planning commission. In all likelihood, there will be heightened sensitivity around preserving recreational land so it may be difficult to rezone recreational land.

Access to Water, Electricity and Everyday Conveniences

Assuming you’re permitted to build a dwelling on the property, you’ll also need to take into account certain practical considerations, including:

• Water. At the top of the list is ensuring access to clean drinking water. For many recreational properties, tying into a shared water supply might not be practical given the remote nature of such properties. Where tying into a shared water supply is not feasible, the most reliable option is to dig a well but note that this is also quite costly. You’ll also need to consider whether the zoning permits you to dig a well.
• Electricity. In terms of electricity, if conventional electrical lines don’t run to the property or will require significant expense to extend poles and electrical lines, then you will need to consider off-grid power sources. This may include solar or wind options depending upon the feasibility of each in your area. If you don’t have access to electricity, a word-burning or pellet stove may be the best heat source.
• Everyday conveniences. Lastly, proximity to everyday conveniences, such as restaurants and grocery stores, may be nonexistent. Even such things as package delivery services that we have come to rely upon in everyday life may be unavailable.  Further, you may not have access to vital services such as emergency medical services if you’re living off the grid. Ultimately, you need to determine whether you will have access to these services at your property and, if not, whether you can live without them.

Tax Implications

Taxes must always be taken into account when buying and selling real estate, especially if you are contemplating changing your primary residence to live on recreational land.

In particular, in both the United States and Canada you can get a tax break upon the sale of your primary residence. In the US, for example, you can exclude the first $250,000 ($500,000 if married filing jointly) of capital gains when you sell your primary residence. Without that exclusion, you’d pay much higher taxes on your capital gains because the first $250,000 – $500,000 would be taxed. In Canada, any gain realized on the sale of your primary residence is completely tax-free.

But you can only have one primary residence. Accordingly, if you own more than one property, you will need to be aware of the tax consequences of designating your recreational property as your primary residence. For instance, while you can get beneficial tax treatment upon the eventual sale of your recreational property (as your primary residence), the same isn’t necessarily true for other real estate you own. So if you plan on keeping your existing home before moving onto recreational land, be aware that you could face a large tax liability on any capital gains if it appreciates in value during any period in which its not your primary residence.

For a more fulsome discussion of the taxation of primary and secondary residences, click here.

Because tax implications vary so much by municipality, type of property, and by individual, it’s important to talk with your tax advisor about it.

Conclusion: Can You Live on Recreational Land?

So can you live on recreational land? If the property is zoned recreational then there will be restrictions on using the land for residential purposes. This may include restrictions on the size and type of buildings that are permitted (if any) and limits on how many days you can reside on the property on an annual basis. While it is possible to rezone recreational land, it will likely be difficult given the heightened sensitivity around preserving recreational land. After speaking with your relevant zoning department to better understand the limitations, you will also need to take into account access to water, electricity and everyday conveniences as well as the tax implications before residing on recreational land.

The post Can You Live on Recreational Land? Zoning, Practical Considerations and More appeared first on Vacation Property Online.

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.

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

Mortgage Considerations When Changing a Second Home to an Investment Property

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

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

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

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

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

Tax Considerations When Changing a Second Home to an Investment Property

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

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

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

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

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

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

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

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

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

Other Considerations When Changing a Second Home to an Investment Property

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

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

Converting Second Home to Rental Property  

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

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

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

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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.

The post Owning Lakefront Property: Pros and Cons of Owning a Lake House appeared first on Vacation Property Online.

Funny House Rules for Guests

Cleanliness

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

Guest Behavior

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

Bathroom

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

Check-out Time

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

Door Code

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

Meals

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

Mom’s Rules

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

Hosts With Pets

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

Rules For Adults

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

Cabin Rules

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

Beach House Rules

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

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

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

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

Whether you’re buying a beach house as a primary residence or a second home, you will need to take into account the unique characteristics of such properties before buying. The same is true whether you are buying a beach house in Tofino, British Columbia or Corpus Christi, Texas, although each location will have its own unique considerations. From understanding zoning restrictions as an owner of a waterfront home to considering house elevation and weather preparedness, there are many things to look into. With this in mind, we’ve outlined some of these consideration below and other useful tips for buying a beach house. Here’s how to buy a beach house in five easy steps.

1. Understand Your Finances

Understanding how much you can afford is an important first step so that you better understand your budget. If you’re buying your beach house as a vacation home, click here for a useful overview of affordability criteria. Next, you will need to secure a mortgage. Importantly, be sure to secure a mortgage before you start looking for a beach house. This is especially true in a competitive market, as sellers will want to deal with qualified buyers.

For a traditional mortgage on a primary residence, competitive rates are available given the low interest rate environment. If your beach house will be used as a vacation home, note that most lenders will have stricter lending criteria because the risk of default is higher with a second home. Mortgages for second homes are also often coupled with higher interest rates (e.g. 0.25% to 0.50% higher) and larger down payment requirements (e.g. 20-30% instead of 5-10%). 

Once you’ve secured a mortgage, prepare a detailed budget to ensure you’re comfortable with the monthly mortgage payments and beach house expenses. Try our mortgage calculator and vacation home cost calculator to help generate your budget. When preparing your budget, be mindful that waterfront properties can carry additional expenses, such as higher water and sewer rates, higher insurance fees (especially if the area is prone to flooding or hurricanes), boat dock and lift fees, as well as septic tank and well upkeep costs.

2. Settle on a Location

If you haven’t yet settled on a location, do some research of popular beach destinations in the locations you’re interested in. Narrow down locations based on real estate prices (and what you can afford), activities available in the area, climate and other relevant criteria. Once you settle on a general area (or areas) stay in a vacation rental close by to get a feel for it. If you like one particular area over others, then narrow your search accordingly. From there, find a qualified realtor that specializes in waterfront properties in the area.

3. Work With a Knowledgeable Realtor to Find the Perfect Beach House

A knowledgeable realtor that has experience buying and selling waterfront properties in the area will be an invaluable resource. They should understand the local market and know what to look out for when buying a beach house. A good realtor will not only have access to MLS listings but also properties that have not yet been listed but may be available for purchase. This may include first access to listings before they reach the general public or even properties that aren’t listed at all.  

With help from your realtor, now comes the fun part of searching for, and viewing, available properties. Remember to be patient as it can take some time to find the right property. Once you’ve found the perfect beach house, submit an offer and sign an agreement to purchase. The agreement to purchase should be subject to a satisfactory inspection and review of appropriate documentation.

4. Conduct Appropriate Due Diligence

Beach houses have their own unique set of considerations and therefore its important to conduct appropriate due diligence prior to closing the purchase and sale. In particular:

Understand zoning regulations and restrictions

First, you will need to understand what restrictions there are on what you can build on the property. Governmental regulations on waterfront properties govern such things as site density, minimum setbacks from the water, the kinds of uses that are permitted and even design and construction. Further, are you able to build a dock or maintain an existing one? Can you build or maintain a seawall? The answers to these questions will need to be understood before you purchase. Separately, if you plan on renting out your beach house, are there short term rental regulations in place in the area? Be sure to check whether short term rental restrictions currently exist and consider whether they might change in the future.  

Understand what you own

In the United States, the State owns the land below the water and the United States has an overriding interest in preserving public navigation. The waterfront property owner has the right to access and accretion (such as sand build-up over time).  

In Canada, Federal and Provincial rules dictate that you only own up to the foreshore, meaning that your property goes just to the high water mark, and you must permit access across the publicly owned land below. As an owner of a beach house in Canada, you have the right of access, the right to protect your property from erosion and the right to accretion as land builds up over time. 

Be sure to review the legal description to determine where the lot extends. In some cases, the property boundary could end well before the water’s edge. Also, it will be important to determine whether there are any additional encumbrances on title that would otherwise limit your use of, or access to, the waterfront. 

Hire a qualified home inspector and other appropriate experts

In addition to the usual house inspection touchpoints, corrosion caused by salt in the air and mildew and mold issues from higher moisture levels can all wreak havoc on a waterfront property. Boundary surveys, elevation certificates and water quality tests can also be important for a waterfront property. For instance, how far above sea level or the lake shore is the house? Is the area prone to flooding? As sea levels have been rising at a rate of 3.2 millimeters per year, and are expected to rise even more quickly by the end of the century, be sure that the beach house is built at an adequate elevation.

5. Close and Enjoy

At closing, you will sign various documents that will transfer money to the seller and transfer ownership of the beach house to you. After the transfer of ownership, you will get the keys to your beach house and you can now enjoy your home!

Other Tips on How to Buy a Beach House

Here are some other useful tips for buying a beach house:

• Confirm that reliable cell phone and internet service is available in the area as certain coastline communities may have spotty reception.
• Install a security system with remote monitoring so that you can keep tabs on the property while its vacant.
• Consider storm-proofing the beach house by adding storm shutters and stainless steel finishings to fight corrosion from salt in the air.
• If this will be owned as a second home, appropriate tax advice should be sought to better understand the tax consequences of ownership.

We hope you’ve enjoyed this article on how to buy a beach house. Be sure to explore our other articles on buying a vacation home including our checklist on buying your first vacation home.

The post How to Buy a Beach House in Five Easy Steps appeared first on Vacation Property Online.

But mortgage rates are typically higher for vacation homes for one good reason – risk. Lenders view a home you don’t live in full-time as risky. You don’t have as much to lose if you default on a vacation home as you do if you default on your primary home. You’ll still have a place to live, but the bank would be out their money.
So, how much higher are vacation home interest rates, and what do you need to know? Check out our guide below on vacation home interest rates.

What rate can you expect?

Of course, everyone wants to know – what’s the rate? While every situation differs based on the property, your qualifying factors, and the market, you can expect to pay rates that are 0.25% to 0.5% higher than you would for a primary residence.

Today’s interest rates are still low, making it a great time to buy a vacation home. On average, primary homeowners pay 2.875% – 3.0% in the United States (according to the posted rates of the “Big 4 Banks”) and 2.34% – 2.65% in Canada (according to the posted rates of the “Big 5 Banks”). For more information on these rates, click on the following links:

• US Banks: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo
  
• Canadian Banks: Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank

Based on these average rates (using today’s rates), vacation homebuyers can likely expect to pay 3.125% – 3.5% in the US and 2.59% – 3.15% in Canada.

How do you secure the best rate?

The rates above are estimates – the actual rate you’ll receive depends on your qualifying factors. Because vacation homes have higher risks, lenders often charge higher vacation home interest rates, but to keep your rate down, do the following:

Improve your credit score

Pull your credit (free copies for US borrowers here and Canadian borrowers here) and see what you can improve on. Do you have late payments? Bring them current. Did you overextend your credit cards (that charge more than 30%)? Pay the balances down. Also, don’t apply for any new credit between now and when you want to apply for a vacation home loan.

Keep your debt-to-income ratio low

Your debt-to-income ratio tells lenders how much you can afford based on your current debts. The lower your DTI, the more mortgage you can afford. The lower you keep your debts, the higher your chance of securing the lowest interest rates.

Shop around

No matter your qualifying factors, it’s always important to shop around for the best vacation home mortgage rate. The rates mentioned above are for illustrative purposes, and are the best rates a lender may offer, but only to those with great qualifying factors.

What are some of the vacation home lending criteria?

Every lender differs in their requirements, but you’ll likely need to meet these requirements to qualify for a vacation home loan.

• At least a 640-credit score – Vacation home lenders require higher credit scores to ensure that you won’t default on the loan. Many lenders require at least a 640-credit score, but some require even higher scores. The higher your score, the lower your risk of default and the higher your chance of approval.
• 20% or higher down payment – Most lenders require a 20% – 30% down payment on a vacation home. The higher down payment reassures lenders that you’ll make your payments on time, so that you don’t risk losing the thousands of dollars you invested in the home.
• Debt-to-income ratios of 43% or less – Your debt-to-income ratio tells lenders how much debt you have outstanding compared to your monthly income. They use this number to determine if you’re an acceptable risk and how much they should (or shouldn’t) adjust your vacation home mortgage rate to account for the risk. For more information on how to calculate your debt-to-income ratio, click here.

Alternatives to second home mortgage

If you don’t want to pay higher vacation home interest rates, there are alternatives to secure financing to buy your dream vacation home.

• Second mortgage on your primary residence – If you have equity in your primary home (the difference between the home’s value and what you owe), you can use it to buy another home. You’ll need to take out a second mortgage or do a cash-out refinance on your first mortgage to get the cash, but you can use it as a down payment on your vacation home.
• Home equity line of credit – Similar to the above, if you have equity in your home but want a flexible second mortgage, a HELOC is a good option. It works like a credit card, giving you a credit line equal to the amount you can borrow. You owe interest only on the amount withdrawn (used). After a certain period of time, however (e.g. ten years) you may owe regular principal and interest payments. This can be a good way to get money for the down payment on a vacation home.
• Reverse mortgage – If you’re 62-years or older in the United States or 55 years or older in Canada (both you and your co-borrower) and you don’t have a first mortgage on it, you can use your home’s equity to buy a vacation home. Many retirees do this to enjoy their golden years in another home without taking out a mortgage. Reverse mortgages don’t require repayment until the owner moves or passes away.

Other considerations

If you plan to rent out your vacation home while you’re not using it, you may be able to use the projected rental income in with your income to secure a mortgage. This may increase your borrowing capacity (allowing you to borrow more) or allow lenders to give you a lower vacation home mortgage rate if it decreases your debt-to-income ratio or serves as a compensating factor.

Overall, a vacation home is a higher risk for lenders, which means you must illustrate that you aren’t a high risk of default. If you’re curious about how much you can afford on a vacation home mortgage or what it would cost you, use this vacation home mortgage calculator to see where you stand.

The post Vacation Home Mortgage Rate: What is the Interest Rate on a Vacation Home? appeared first on Vacation Property Online.

Before you jump in headfirst, though, there are some considerations to make as you learn how to manage a family vacation home.

Understand your Family’s Interests

Just because you’ve always dreamt of having a family vacation home doesn’t mean your family members are on the same page. Gauge everyone’s interest before investing in the home. If your children are young, they’ll likely enjoy having another home to go to and have fun with the family.

If your children are older, though, and you envision them inheriting the home and loving it as much as you do – ask first. They may like having the freedom to come and go, but when it comes to ownership, they may not want any part of it. This is a big factor in how to manage a family vacation home.

Setting up the Rules

If you will rent the property out to others or even share it with a dedicated family, it’s important to set rules. Everyone has their own preferences, but here are a few ideas:

• Pets – Yes or no? If yes, what type of pets and what are the rules? Can they go on the furniture? What should happen if the pet ruins the carpeting or chews up the furniture?
• Cleaning – Who’s responsible for cleaning the cottage before leaving? Will you hire a cleaning service or will the renters be responsible for leaving the cottage the way they found it?
• Maintenance – Who will handle the maintenance and pay for it? If you’ll hire out, how often will they visit the property and do things like change lightbulbs and air filters, checking the AC or furnace, or clean the gutters?
• Breakage – Who is responsible for paying for broken items? Have an agreement in writing so there aren’t any arguments when it happens because it will.

Splitting up the Time

With a family vacation home, splitting up the time, especially the important dates is crucial. Go over any important holidays, birthdays, or family celebrations to determine who will have the cottage on each date. This is important when you figure out how to share a family cottage. For example, New Year’s Day, Fourth of July (United States), Canada Day (Canada) and Christmas are all popular days that vacation homeowners want to escape to their ‘paradise.’

To avoid any arguments, split up the days ahead of time and in writing. If you need to swap mid-year, you can work out an arrangement that works for both of you, but again, keep it in writing so there aren’t any misunderstandings down the road.

Taking Reservations and Collecting Payments

If you will be renting out the home to others, who will be responsible for taking reservations, confirming with renters, and following up after their visit? What about collecting the rent payment? Do some research and find a vacation rental payment service you trust. There are hundreds of options, which frees up your time in chasing rents, eliminates the worry of a bounced check, and allows renters to pay in their preferred method either credit card, Venmo, or even PayPal.

Have an Exit Strategy

Just like when you buy a primary home, you need an exit strategy. Will you put the vacation home in your will and pass it down? Will you sell it when you’re too old to take care of it?

What happens if you have a financial crisis? Do you have a fast exit plan? Also, think about what happens if you and any co-owners have a falling out. Who will buy out the other family or will you sell the property and both exit?

What Will You Do With it When You Aren’t There?

A family vacation home is typically used as a second home rather than an investment property. As such, the home can sit vacant for long periods when not in use. This does a few things:

• Leaves you with bills to maintain a home you aren’t living in
• Leaves the home open to vandalism or theft

You may consider sharing the cottage with another family (shared ownership) or renting the vacation home out to others. At a minimum, you will need to arrange for someone to check on the property regularly, whether it’s another family member or property manager.

Enjoying your Family Vacation Home

What’s most important is enjoying your time together with your family at your vacation home. If you take care of the tedious details ahead of time, you’ll avoid arguments, stress, and even financial issues.

Set up the rules, create strategies, and revisit them annually to make sure you’re still on the same page as you were before. If you need to make changes, enlist the help of your accountant or lawyer, especially if you share the cottage with other families.

Bottom Line

Knowing how to manage a family vacation home so you have the time away that you need, but still make money renting it out, is important.

Take your time when looking for the right vacation home and securing financing for it. If you take out a mortgage, make sure you can afford it along with the mortgage on your primary residence. Some people even take money out of their primary home’s equity to buy the vacation home.

You decide what’s right for you, and make sure you look at all factors before claiming ownership. When done right, owning a family vacation home can create some of the most memorable memories of your lifetime.

The post How to Manage a Family Vacation Home the Right Way appeared first on Vacation Property Online.

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

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

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

Keys to Successful Implementation of House Rules for Vacation Homes

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

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

VACATION HOME RULES FOR GUESTS (LONG FORM)

Dear guests,

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

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

1. General Rules

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

2. Noise Levels

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

3. Visitors and Gatherings

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

4. Parking

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

5. Garbage and Recycling 

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

6. Security

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

7. Outside Facilities

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

8. Smoking and Illegal Substances

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

9. Pets

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

10. Damages

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

11. Checkout

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

12. Emergency Contact Details

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

13. Compliance

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

VACATION HOME RULES FOR GUESTS (SHORT FORM)

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

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

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

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

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

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