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.

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

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

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

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

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

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

Mistake #7: Completing a Purchase Without Adequate Tax Planning

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

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

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

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

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

With a timeshare, you own a portion of a vacation property that you can use on a limited basis, usually once a year. Depending upon the type of timeshare (fixed week, floating etc.), your usage rights may vary slightly. For these reasons, its important to read the fine print to better understand your usage rights, annual fees and other obligations. While timeshares are more affordable than outright ownership, the costs can add up over time and they are notoriously hard to sell. For these reasons and more, be sure to take your time to fully-understand what you’re signing-up for before completing a purchase.

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

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

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

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

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

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

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

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

Mistake #3: Buying Before You Visit the Area

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

Mistake #2: Buying While on Vacation

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

Mistake #1: Spending More Than You Can Afford

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

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

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

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Vacation Home vs Investment Property: General Distinctions

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

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

Return on Investment 

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

1. Increase in Resale Value

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

2. Rental Income

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

Ownership Intent

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

Scenario #1: Personal Use

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

Scenario #2: Income Generation

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

Vacation Home Tax Rules

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

United States

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

Canada

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

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

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

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

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

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If you’re dreaming of vacations on the lake with the family, owning a cabin or cottage can become a reality with a little planning and saving. A great way to help balance the cost of the investment is to rent out your cabin or cottage. Below are our top nine things to keep in mind before buying a cabin to rent out.

Top Nine Things to Consider Before Buying a Cabin or Cottage to Rent Out.

1. The Location and Accessibility

Over the last few years, the demand for cabin rentals is booming and the number of online rental platforms has exploded. But it takes more than a cabin or cottage with character to attract renters. The key to a popular cottage is location.

Proximity to water is the top criteria that cottage renters are looking for, and your property will be even more attractive if it’s also within a two-hour drive of a major center.

Cabins close to ski resorts are also in high demand. Additionally, if you plan on mortgaging the cabin, banks tend to look more favorably on rental properties that have year-round access and those that are winterized.

From an accessibility standpoint, a remote cabin in the woods may sound like a dream but it can be a logistical nightmare when buying a cabin to rent out. Before you buy, make sure you know all the ways you can access the property. Is it accessible by road or only by boat? Is it accessible during the winter? Do the roads get plowed in the event of snow? This is important to know so that you don’t end up with angry renters who can’t access the cabin or with a maintenance problem that you can’t tend to because of limited seasonal access.

2. Cellphone Reception and Internet Access

According to a recent Royal LePage survey, the most important factor when deciding to buy a vacation property is cell phone reception and internet speed. It’s with good reason too. While one of the draws of owning a cabin outside the city is to disconnect from regular life, most people want to stay connected to some degree. For a rental cabin or cottage, this is even more important for managing the guest experience. If questions arise during your guest’s stay or issues come up, you will need to have an effective means of communication. Lastly, many travelers will often wind down for the evening by watching their favorite show on Netflix or other streaming service. Without fast internet, this won’t be possible.

3. Access to Clean Drinking Water

Most of us probably take for granted the drinkable water that comes out of our taps every day, but this may not be the case with rural cabins or cottages. The risk of water problems and contamination is far greater in rural areas than in well-established cities. So, before buying a cottage to rent out, look into the water situation. If there is a well, the water will need to be regularly tested. In some cases, you may even have to bring with you your own clean drinking water.

4. Renovations

While a rustic cottage is great, a modern cottage with a newly renovated kitchen, internet, television, and hot tub is even better.

These days, renters are looking for the same comforts that they would find in a hotel.

Before buying your cottage, consider how much work you’ll have to put into it before it’s ready to be rented out. Are you confident enough to DIY the reno’s or will you hire professionals? How would renovations impact your budget? How long will they take before the cottage is ready for renters? These are all important questions to ask yourself before buying a cottage to rent out.

5. Rental Rules in Your Area

Before buying a cabin to rent out, be sure to find out what the rules are in the area. Short-term rentals are prohibited in some areas. For example, many California cities and counties have passed short-term rental ordinances to reduce problems associated with short-term rentals, including noise, parking, partying and trash. Similar ordinances have been passed in other states such as Colorado and New York. In the province of Quebec, there is an obligatory classification system for short-term rentals. This program costs owners roughly $250 annually. Out west in Whistler, BC, you will need to ensure that the cottage is properly zoned and obtain a tourism accommodation license. As the rules can vary wildly from state to state, province to province and city to city, its important to run this to ground before buying.

6. Advertising

Managing a rental property can be a lot of work, especially when you initially put the cabin or cottage up for rent. To increase the profitability of your rental cabin or cottage, you’ll need to have high-quality photos. Photos are what draw in travelers. They’re what makes potential renters decide whether or not to click on your listing to learn more about it. Having eye-catching photos can also inspire renters to save your listing to their Wish List on Airbnb. The more times your listing is saved to a wish list, the better your SEO ranking will be. Borrow a friend’s camera, if you’re unable to hire a professional photographer, and take photos when there’s lots of natural light in the space.

To increase your chances of renting, be sure to list your cottage on multiple rental sites, like Airbnb and HomeAway.

However, keep in mind that, depending upon the platform, there may be additional annual listing costs. Also, it may not be worth it to advertise on national or international platforms if your cabin or cottage is located in an area that doesn’t typically attract out of state (or province) tourists. Before signing up with any of these rental sites, do some research. Try searching on Google several keywords associated with your cabin or cottage and see what websites show up. This may help you decide where it’s worth listing.

7. Property Management and Maintenance

If you’re considering buying a cabin to rent out, you need to make sure you or someone you trust will be able to manage the property. This includes maintenance, mowing the lawn, cleaning, and even picking up or dropping off the keys. Without maintaining the property and being responsive to guests’ needs, you’ll likely accrue negative reviews, which could impact future bookings. If you’re unable to tend to the property yourself, research your options and the costs associated with a property management company. For remote properties, keep in mind that you may have relatively few options.

8. How Much You Can Rent Your Cabin or Cottage For

The price you can rent your cabin or cottage for comes down to a few factors. Firstly, location. If your cottage is in a desirable location, you’ll likely be able to charge a little more. Before buying, do some market research and compare your cottage to others nearby. That way you’ll be able to determine a somewhat-accurate price based on the desirability of the property in comparison to those around you. Second, what amenities and other extras can you offer your guests? Does your cabin include two bathrooms whereas most others in the area typically have one bathroom? Does your cabin include a canoe or kayak for guest use? Be sure to factor in any extras you may offer guests and fine tune pricing after you’ve received some bookings.

Importantly, once your cottage is open to renters, be sure to request a refundable security deposit. A hefty security deposit lowers the chances that you’ll end up with renters who abuse your equipment and furniture.

9. Insurance costs

Cabins and cottages tend to face higher risks for weather-related issues. For example, cabins in coastal areas are more likely to be hit by hurricanes or experience flooding. Cabins situated on islands are less desirable for insurers because they’re harder to get to. Your insurer must also be aware that your cabin or cottage is being used as a rental property, as you will need to update your insurance to a rental property insurance policy.

We hope you’ve found these tips on buying a cottage to rent out useful. Be sure to explore our additional resources on buying a vacation home, including everything you need to know before buying a vacation home.

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

One-time Costs

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

Recurring Costs

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

Other Costs

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

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

One-time Costs

Initial upfront vacation home costs include:

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

Recurring Costs

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

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

Other Costs of Owning a Second Home

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

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

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

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

Conclusion

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

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By way of background, two owners of waterfront properties on Red Lake, BC (about 50 km northwest of Kamloops) fought an action by Thompson-Nicola Regional District (“TNRD”) seeking an injunction restraining them from using their properties as short-term rentals. The properties had originally been bought in April 2008 and were used since that time as recreational properties and for short-term rentals. In 2012, however, new bylaws were approved restricting short-term rentals in the area. While grandfather provisions were adopted allowing a previously permitted use to continue in effect, the previous bylaws were silent on whether short-term rentals were permitted. In deciding for TNRD, the court concluded that short-term rentals were never a permitted use and ordered that the defendants cease all short-term rentals of their recreational properties.

One of the key takeaways from this decision is that, while its important to ensure that the proposed use of a property is not restricted by local zoning bylaws before you complete a purchase of a recreational property, its also important to ensure that the proposed use, in this case short term rental, is expressly permitted. Otherwise there is a greater risk that the proposed use is not permitted and that local bylaws may become more restrictive over time.

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