Today is a warm, but not hot, day here in Toronto. Our minds are turning with the weather toward the Fall Season.
As a savvy financial professional, you know that a good time to purchase a vacation property is when the crowd is moving on to other interests.
Like a lot of people, you previously considered purchasing a vacation property but waited. Now might be the time for you to act.
This Spring and Summer, the cottage country market was busy with a lot of people who wanted to escape the city. Demand was strong. A lot of us discovered that we do not need to be in the city 100% of the time, or at all.
Out of habit, we sometimes still speak of ‘summer homes’ but a lot of us like to get out there four seasons of the year. Swimming on a warm August day, Thanksgiving and the spectacular Fall foliage, snow falling on trees, Christmas and New Year’s guests, and the first warm days of Spring. Why miss any of it?
You might be inclined to wait until Spring along with a lot of other people. Or you could start now when sellers are contemplating being stuck with a property for the winter. Here are some financial tips to keep in mind.
This is an opportunity to expand your financial and real estate portfolio while enjoying the use of a property that will be wonderful for you and your family. It represents another step toward financial security in your retirement years. However, as a mortgage broker, I would want to be sure that you can afford it. Can you manage the mortgage payments, taxes and upkeep? Call me and I can help you work out a budget that makes sense for you.
A brilliant way to buy a property that you do not intend to live in is to rent it out for part of the time. Instead of paying $1,000 - $3,000 per week, you will be the recipient of this amazing stream of passive income during times when you do not need the property for your use.
Lending institutions have different qualifying criteria and mortgage product options than traditional home purchases. Rules vary from lender to lender, although it might be difficult to find the differences on your own. You can get mortgages for all kinds of places - maybe you want to buy a cottage on an island with only winter ice road access! Many interesting possibilities are available to you, but call me to discuss the details.
Some heavily-promoted options are difficult to finance. If you are considering buying a unit within a hotel as a vacation spot (known as "fractional ownership"), it can be difficult to get financing. Property on leased land can be a challenge, but not impossible. Do not go far down the real estate road before calling a mortgage specialist for information about financing.
The minimum downpayment will vary, possibly as low as 5% or as high as 50% of the purchase price. The verifiable funds must come from your resources or a non-returnable gift from someone close to you. If you have the money in your account for three months or more, you are golden. As well, for some properties the sellers may be willing to assist with part of the financing of your purchase.
A portion of the rental income can be used to qualify for a mortgage and to determine how much of a mortgage you can afford to borrow. The rental income may be added to your income in calculating the maximum mortgage amount. For example, a lender might allow you to add 50% of the rental income to your income in qualifying for the mortgage. Other lenders may allow up to 80% of the rental income while subtracting your expenses. The differences between them can be significant. Do not fall into the Canadian mindset of thinking that all financial institutions are the same!
Interest rates may be a little higher when the mortgage is for a rental property, a second home, or for your principal residence. Some hopeful cottage buyers fudge on the facts and pretend that it will be their primary residence to get a better deal from the Bank. If your financial institution catches you, it will get ugly.
You will want to speak to your accountant and lawyer about capital gains tax, passing the new family HQ down to your children, taxes, and other serious matters as you contemplate lounging on your new dock.
Are vacation properties a good investment? The answer is: it depends. There are so many possibilities outside of Toronto, from prime Muskoka lakefront to hunting cabins in the far north. Some regularly increase in value and sell easily. Others remain unsold and unloved for years.
Are you looking forward to the day when you are 100% debt-free? Cottage ownership can help you on your way because you enjoy the increasing value of the property and additional income. On the downside, you will be tempted to store extra ‘stuff’ up there, rather than have a yard sale and get rid of it.
You might be surprised to learn that owning a Canadian vacation home is still affordable for middle-class Canadian families. Essentially, you need to be a good saver to raise the downpayment and have stable income so you can make the payments every month.
Call me to discuss the possibilities available to you. You might be surprised to learn that you too can spend summer weekends doing chores and entertaining long-lost family members who love the fact that you own a cottage.