These cold winter months in Barrie have us all dreaming about warmer weather on the beach. Wouldn’t it be nice to have your own place in a vacation paradise? We all want that excitement of hopping on a plane or planning a road trip to spend the winter months somewhere warm. Whether you are looking to buy a rental vacation property located on the beach or in the snowy mountains, there are a lot of things to consider first.
1. Can you actually afford a vacation home?
This is probably the first question we ask ourselves when dreaming about buying a vacation home. Step out of your daydream and think about this harsh question…can you afford it in the long run? Maybe you did the math and realized you do have enough for a downpayment on the property. But, think this through. You’ll be paying a double mortgage. This means that your monthly expenses may double or triple the cost of a second property.
When you buy your new vacation property, it’s most likely to come without appliances, furniture, toiletries, and common household items. It’s not like you can bring a couch as a carry-on on the plane, so you have to factor in the cost of shipping furniture from your current location or purchasing all-new items to make your home complete when you get there.
It’s not just the initial house cost that you have to worry about — like the downpayment, land transfer tax, real estate agent fees, travel fees, and so on. It’s the hidden fees that you must think more in debt…or I mean “depth” … about.
2. Work with a mortgage broker or financial adviser when thinking about buying a vacation home
Just like purchasing a home near Barrie, you must go through the process of getting pre-approved for a mortgage before hunting for your dream vacation home. This process is a little bit more complicated because you have to factor in your current mortgage and monthly costs of your primary residence at the same time. It’s best to work with a trusted mortgage broker and financial adviser when thinking of purchasing a second property like this so they can help you overcome potential roadblocks while painting a solid financial picture for the lender. Whether it’s for your own enjoyment or you are purchasing it as an investment, have a professional find you the best possible mortgage options and rates on your current and future home. In the long run, doing so can make a substantial difference in how much interest you end up paying.
3. Understand the different types of mortgages for your vacation home
There are different types of mortgages depending on the type of home you are buying. You may already be paying a primary home mortgage, but there are also investment property mortgages and second home mortgages. Getting pre-approved for an investment property mortgage or a second home mortgage can be challenging. You are viewed as more of a financial risk so lenders require a lot more documentation and a larger downpayment than what you would have paid on your first home. Securing the right mortgage is more than just finding a great rate. An experienced mortgage broker will explain to you the benefits of the various mortgage options available along with the pros and cons of each. They can also help you gather all the documentation you need to prove your income and where the money came from for your downpayment. Plus, it’s free to work with a mortgage broker, so why not take advantage of professional advice and save money while you’re at it!
4. Will your vacation home be a rental property or an investment property?
What is your goal for your vacation home? Do you plan on renting it out to friends and family to head down south for the winter, or do you want to make it into an Airbnb? Having property insurance, reliable guests staying at your home, and some extra money saved up for renovations or sudden hidden costs or incidentals must be considered.
It may be possible to take advantage of tax breaks for mortgage interest and property taxes if you don’t primarily use your vacation home as a rental property. If you live in the home for at least two weeks out of the year or if it’s rented out for 10% of the days, you can treat it as a vacation home instead of an investment property. For example, if you own a place in Mexico and rent it out for 6 months of the year (around 180 days), you would have to occupy the home for at least 18 days out of the year to be considered a vacation home. If you spend less than that, then it’s an investment property and you have to pay different mortgage interest rates, property taxes, and will receive different tax breaks.
Keep in mind, many common vacation destinations also have restrictions on rentals. Some locations may prohibit renting out a home for less than a month without buying a very expensive “transient license” for the property. Some condo buildings also have restrictions on who you can allow to use your property so be sure to investigate the rules in the country and city you are buying in ahead of signing on the bottom line.
5. Develop a maintenance plan for months that you aren’t visiting your vacation home
Have a plan in place for the upkeep of your vacation property for when you’re not there. You may have to hire a maintenance company to come by and check on your home in your absence. If your vacation home is somewhere hot, then who’s going to cut the grass? Maybe a pesty iguana chewed through the electrical wires in your walls and now you have to hire an electrician to come out to fix it. If your vacation home is somewhere cold, who’s going to make sure your furnace is working properly so your pipes don’t freeze?
If you’re planning to use your vacation property as a rental, you will need a property manager close by who will arrange for cleaning and restocking between guests. There are hidden costs everywhere you turn, and because you aren’t spending as much time at your vacation property, things can get overlooked and costs can stack up to bigger problems in the long run.
6. Consider the new housing rules of the location you are buying in
The location of your vacation house has the potential to make or break your investment. For this reason, you need to ensure that the house is in a secure environment. Factor in the cultural, financial, and political situations where you are thinking of buying. Local taxes may be different or mortgage rates could be difficult to understand. Think about the different weather patterns and have a plan in place for weather emergencies as well. We don’t have to worry about hurricanes or avalanches in Simcoe County but you may have to keep that in mind where your new vacation property is located. You are buying a home in a new city or country even, so local customs, by-laws, and cultural rules may be different. You don’t want to offend your neighbours when you’re not there so it’s important to learn the cultural rules where your new property is located and if you plan to have renters or guests be sure to create a list of rules for them to abide by.
7. Does buying a vacation home fit your lifestyle?
It would be nice knowing you have a tropical place to live during the cold winter months. But if you only go during the Christmas season, is it worth investing all that money? Think about your job and your career. If you have the pleasure of working from home then you can work anywhere that has reliable internet. But if you’re a nurse working long hours without a lot of vacation time, then investing in a long-term vacation home may not be the best option for you.
8. Is your vacation home an investment for your future retirement?
Maybe you plan on eventually using it as a full-time home when your lifestyle is ready for it. In this case, the investment is probably worthwhile if you have the funds to support it.
In case you are wavering there are a few other options if you’re reconsidering buying a vacation home
I know, I know, I may have burst your bubble a little bit and discouraged you from purchasing a vacation home. But, there are other options out there if putting a sold sign up isn’t for you.
- Invest in a timeshare.
That’s when a group of people buy a home together and can use that property for a certain amount of time each year. Just know, that this option could lead to some unintentional tension over who gets to stay there during a holiday, or how they upkeep the investment that you put money into.
- If you know of someone lucky enough to own a vacation home, ask if you can rent it from them.
It’s a good investment for the owner and could be a lot cheaper, and more reliable, than renting from a random person listing on Airbnb or Vrbo.
- Work with a travel agent to help you find the best possible deals when planning a long-term vacation.
That last one speaks for itself.
Whether you plan on purchasing a vacation home or you’re in the process of getting pre-approved for a mortgage for one, it’s important to work with a mortgage broker. I can help you get the best possible rates, mortgage options and determine what type of mortgage works best for a new vacation home in the area you are wanting to buy-in. With the added benefit of also being a financial adviser, I can help you develop a financial plan to get you well on your way to getting pre-approved to purchase your dream vacation property. Whether you’re buying a cottage in Canada or a home in Florida, I’m available for all your mortgage and financial needs. Give me, Darren Robinson, a call today and let’s make your dream a reality.