Vacation Home Costs (Summary)

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.