Buying a vacation home: 10 things to know

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By Tony Wong

Buying a vacation property is one of the most rewarding things you can do. But it can also be a complex and stressful experience with pitfalls that are different from those you encounter when you buy a house.

Here are 10 things you need to know:

1. Why do I want it?

Buying a vacation home isn’t always about just about a place to retire or relax. It can also be an investment which generates income when you don’t want to be there. So that’s your first question. Are you using this second home mainly for fun or do you want to rent it out and make some money?

If it is mainly for personal use, then the most important consideration might be the size of kitchen. Is it big enough for family gatherings? Or you might want a big yard for the kids to play, or a massive deck overlooking the lake to barbecue and watch the sun go down. If you are an investor those sorts of detail may be unimportant. What you might be looking for a smaller property because it is easier to manage and rent.

Figuring out where you are on the spectrum and what is most important to you will help you find the characteristics of the property that will benefit you the most.

2. Keep your emotions in check

Just because you have the cash for a down payment doesn’t mean you should buy the property.

Buying a vacation home is fraught with risk because it appeals to the emotions. Before you start on your journey make sure that you do a thorough check on your finances. Is your primary home paid off? Can you carry the operating costs? How much can you afford?

Finding a mortgage in different parts of the globe may be more difficult, so be prepared to pay a higher percentage in cash if that’s what it takes.

Some people take out the equity on their primary home to make a down payment on the vacation home. All’s well and good if the housing market remains in positive territory. But if the market falls, so does your equity. How can you enjoy your vacation property when all you can think about is the debt you’re racking up?

3. Where do I buy?

Your dream vacation home might be your backyard or Florida, Arizona or New Mexico. In Ontario, Muskoka and the Kawarthas have been a traditional rite of summer vacation, within reasonable driving distance of major cities like Toronto, Ottawa and London.

But a strong dollar, means Canucks are looking south of the border. Canadians were the number one foreign purchasers of American property in 2010.

Latin America and the Caribbean have long had a strong attraction for Canadians. And there is increasing interest in buying second homes in far-flung destinations especially since currencies like Euro have devalued relative to our dollar.

The important thing to think about is the time and the hassle it takes to get there and how often you can actually use it. You’re more likely to head north to cottage country for the weekend then fly to Phoenix for two or three days.

4. Consider pooling resources

One way to ease the burden or to get a nicer property is through joint ownership. Your brothers or sisters might want to go in with you so you. Friends may want to do the same. The key is to make sure everyone understands the rules of the road, including a fair way to split up prime time use, what happens when one party wants to sell and who inherits the property.

5. Beware of tax implications

Buying a home outside Canada also has tax implications. Canadians must report U.S. rental income on their Canadian tax return. Canadians who own U.S. property may also face an estate tax when they die. Rates start at 18 per cent and may hit 45 per cent for properties over $1.5 million, although there is some relief in the form of a U.S. Canada tax treaty that could lessen the impact. When Canadians sell a U.S. property up to 10 per cent of the proceeds may be withheld. That money can be used to offset the US income tax payable on any capital gains. The difference will be refunded if the money withheld exceeds the tax owing.

6. Location is key

Buy a condo a block away from the beach and your potential rental income could drop by half. Vacationers are willing to pay extra for that week or two they spend in paradise. Views and beachfront are traditionally two of the main features people look for. Consider the trade offs. You may go for a lesser property closer to the beach than a larger property further away.

7. Condo vs house

Do you have a big family and like to be surrounded by friends? Or are your vacations a chance to get away from it all? Thinking about this will help you decide whether you need a small condo, or fully detached home with lots of space.

Make a list of your important features. Things that were important in your family home may not be as important in a vacation property. Do you really need tons of closet space for your two suitcases? Will a galley kitchen do since you plan to be eating out a lot?

On the other hand, maybe you always wanted a pool, or an outdoor shower. Then revisit the amount of time you plan to spend at the vacation property to see whether it’s cost effective.

8. Check out the neighbourhood

Once you’ve decided what to buy and where, stay for a few days and look around. You’d be surprised how many people buy from blueprints only to have a rude awakening later.

You may have vacationed in the area before but not really gotten to know anyone. Talk to neighbors and locals. What do they think of the area and what is it like in the off season? Can you walk to cafes and shops? Is this a good fit for your family?

9. Look for hidden costs

Take a look taxes, management and condominium fees. Florida’s Homestead Act means out-of-state residents pay higher municipal taxes than those who live there.

Other things to consider:

•Does the condo association allow rentals? If so under what conditions. Must they be long-term periods of several months or can it be weekly?

•Does the condo association have an adequate reserve fund to pay for future repairs. If not, you could be hit with a special levy once you move in.

•If you are buying in a foreign currency and have a mortgage, you can hedge your risk to avoid currency fluctuations. The most straightforward way is to buy for example, U.S. dollars if you are going to make a purchase down south. This is because you think the Canadian dollar is currently high and may fall in the future. You can park those dollars in the bank until you are ready to make a purchase. But there are also avariety of financial products that allow you to secure today’s rates for a future purchase.

10. Cheap doesn’t always mean bargain

Buying on impulse is probably the worst thing you can do. Just because you’re enjoying your March Break in the sun, step back and consider all the factors. Don’t be blinded by a fire sale price. Do your due diligence.

Tony Wong is a Toronto Star business reporter who writes about real estate. This article was prepared for Moneyville’s launch and has been updated.