Purchasing a Vacation Home | by Guest Author Linda Stern, Licensed Insolvency Trustee
Your Own Vacation Home
Owning a vacation home is a fascination for many people. In addition to being a getaway from the city, the property may turn into a lucrative long-term investment. The desire to purchase one often starts as an emotional decision while renting a cabin or cottage, or even visiting friends at their country home. It is an irresistible prospect while watching your family kick back, relax and enjoy themselves in ways that you cannot at home. Wouldn’t your own place make all of this so much more accessible?
Before you take the big plunge to purchase a vacation home, here are some practicalities to consider, first.
Experts suggest the most desirable locations for vacation homes are beside oceans, lakes or rivers, or near mountains. It goes without saying that you should visit the property several times to get acquainted with it. Your tolerance about the commute must remain a big factor in this decision. Travelling to your vacation home will often coincide with rush hour and holiday traffic. In addition, you must also consider whether the roads are properly maintained for your seasonal visits. You might have to budget for extra transportation costs like a ferry, boat or plane ride to get you there.
The longer and more expensive the commute, the less accessible this property will be in reality. You might only use it if the commute remains convenient and affordable for your lifestyle.
You may consider building your home or cabin from scratch on a stretch of land with a stunning view. If so, research the service costs thoroughly. A property that requires water, hydro and sewer to be linked up will cost more than you bargained for.
Furthermore, you should also investigate the zoning bylaws carefully. If you expect to own a peaceful oasis with a view, you must ensure that a busy high-rise hotel or noisy amusement park will not go up in the future to block your view or disturb your peace.
Vacation Home Upkeep and Security
You will not live in your vacation home year-round. Yet it will require upkeep, just like your primary residence. Many cottage owners concede to spending some of their vacation time on D.I.Y. home improvement. On top of it, this property will require regular maintenance such as yard work, pest control and cleaning.
Your lifestyle and budget should be set for double duty in both your homes. If you do not have the interest or aptitude for it, then you must look for local contractors and property managers to perform them for you. This means that you will have to make time for inspection visits while renovation or repair jobs occur. And then again to sign off on them, when complete.
Furthermore, you must protect your property from crime when you are not there. Consequently, all vacation homes require additonal costs for a security and alarm monitoring system.
Renting your Vacation Home
Some individuals purchase a vacation home by assuming they can offset the carrying costs through rental income. To do this, you must understand the true costs of ownership. You will incur monthly mortgage, insurance, property tax, utility, trash removal and some upkeep costs even when the property remains vacant. Rental income will only be forthcoming during vacation season. And it will not be easy to forego the high peak season rental rates if you depend on them. This will mean compromising on when you can use the second home, yourself.
In fact, if this is your sitauation, then also consider the following: Your property will require both extra effort and funds for marketing to find vacation goers. You will have to keep the property cleaned and well maintained for your tenants. And furthermore, the rental income might increase your personal income and subsequently place you into a higher income tax bracket.
Your personal and property taxes are certainly one consideration. But capital gains taxes are another. Your principal residence is exempt from capital gains taxes. Owning a second property changes your future tax burden. It is important to go into this purchase with eyes wide open about taxes and all of the additonal costs. Contact your advisor about the tax implications of owning this second home before you make the commitment.
The potential for capital gains taxes on this purchase will become a reality if you decide to sell the property in the future or leave it behind to your spouse or children upon your death. Sometimes, beneficiaries find the tax burden and carrying costs too high to hold onto the property. You must therefore revisit this issue several times in your life, as your family’s circumstances change, to ensure the vacation home continues to serve your purposes.
Managing Your Debts
If you are considering this as a long-term investment, a financial advisor would only recommend it if your cash flow allows you to diversify your investments to weather market value decreases. They would never recommend your vacation home as the only means to fund your retirement.
Your holiday home will become a stressful purchase if you do not understand your finances on a granular level. Before you purchase a vacation home, consider creating a budget to ensure your cash flow can carry the debt and true costs of second home ownership.
If you have already entered into this purchase and are having trouble making ends meet, when should you cut your losses? A clear early sign is if you regularly maximize your credit card limit and have trouble paying the balance when it is due. If this is your situation, then you must seek out credit counselling and debt management as soon as possible.
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.