Sales of vacation homes soared during the pandemic, and with remote work options here to stay for many people, they remain popular.
Thinking about investing in a vacation home – either for your own use or as an income property? The idea is alluring. If you’re considering purchasing another property, here are some tips on how to make your purchase a success.
Consider your Mortgage Strategies
Investing in another property for most people will mean taking a look at mortgage options. If you’re going to finance your purchase with a mortgage, the biggest decision is between fixed and variable rates. In early 2022, this is particularly complex, because it’s an unusual time for both borrowers and lenders.
The gap in rates between variable and fixed-rate mortgages is at a historically wide level, making variable rates more attractive from a cost standpoint. With inflation at the highest levels in decades, the Bank of Canada has embarked on a rate-hike cycle, and no one knows how high rates will ultimately go. You’ll have to weigh the risk that the Bank of Canada will raise rates more than expected versus the extra cost you’d pay to forgo that risk if you choose a fixed-rate mortgage.
Here’s a strategy that can work well for borrowers who choose variable rates: use a mortgage calculator, figure out what your monthly payment would be if you went with the current fixed rate, then set your payment at that level. That way, you’ll give yourself a buffer against rising rates and you’ll pay your mortgage down faster for as long as the gap between variable and fixed rates exists.
Be Aware of Additional Costs
With the popularity of vacation rental home websites such as VRBO and Airbnb, you may be thinking about earning some extra income by renting out your property when you’re not using it – or even using it strictly for income purposes. If so, be sure to account for some of the associated costs and fees.
Consider the time and cost to clean and care for the property between guests, and general maintenance overall. If the property is far away or you would rather outsource this job to a property manager, you’ll need to account for this expense when calculating your forecasted return on rent.
Property-management fees vary widely amongst providers and by the amount of revenue your rental generates. Before making your purchase, make sure you have an estimate and are clear on the fee structure.
You’ll also need to cover for insurance costs. Renting a property to vacationers is likely to involve a higher premium or even a separate insurance policy. There are some policies specifically available for a property’s short-term rental aspects or can be tied to your existing homeowner’s policy, for example. Check with your provider and make sure you have the right insurance – the consequences can be heavy if tenants damage the property and leave you with a hefty repair bill.
When selling a vacation property, bear in mind that vacation homes don’t qualify for the principal residence exception, or PRE, that shields your main home from capital-gains tax upon sale. It’s calculated by taking 50% of the gain on the sale and taxing that portion at the seller’s marginal tax rate (adding it to your income in the year the sale occurred).
BlueShore Financial Advisor Mona Heidari and client discuss financial planning at the Lonsdale Financial Spa.
Protect your Property When it’s Unoccupied
If you and your family will be the only users of the property, one of your biggest priorities will be safeguarding it from intruders, wildlife or water infiltration when no one is there.
If the property will be vacant for long stretches, you’ll want to inform your insurer, as many have requirements to maintain your coverage while you’re away, such as having someone check on the property at specific intervals and/or ensuring the water is turned off, pipes are drained and the heat is left on, for example.
The good news is that the smart-home trend has given us many affordable ways to monitor our property. You can buy Wi-Fi enabled cameras for a low cost, use connected water sensors to send you an alert if there’s a leak or a broken pipe, and you can install smart thermostats to monitor and adjust for temperature and humidity. You can even buy Wi-Fi enabled light bulbs, switches and plugs to turn on and off from your phone, giving the impression someone is there.
Keep an eye on government policy
In response to the housing crisis, provincial, federal and municipal governments have brought in policies that may affect your purchase. For example, BC’s speculation and vacancy tax applies an annual surcharge for homes that aren’t your principal residence and are not rented for at least six months of the year in certain cities, such as Vancouver and Kelowna. Keep up to date on the latest policies and how they might affect you.
Seek trusted advice
Purchasing an investment property or vacation home can be both an exciting and complex undertaking. We can help. A BlueShore Financial Advisor will work with you to ensure your dreams for a vacation or investment property can fit into your overall financial plan – so you can stay focused on relaxing in your new getaway or reaping the rewards of your investment.
In need of expert financial advice? Contact BlueShore Financial today at 604.982.8000 or visit us online at blueshorefinancial.com.