Recreational Properties

Thinking of buying a vacation property? Here's what you need to know

July 2008

Thinking of buying a vacation home that you can use at your leisure, instead of renting every summer?
Before you sign a purchase agreement, remember that making a smart decision involves more than finding a great view at an affordable price. Purchasing a recreational property can affect your finances and your lifestyle, now and down the road. Here are some important factors to consider.

Take stock of your goals

As a start, ask yourself the following questions. Be honest about what you and your family really want.
- How often will you use the property?
- How much will it cost to get there?
- Will you use it year-round?
- Are you looking for an investment property, something to pass down to future generations, or a place to just relax?
- Will it become your retirement residence?
- Would it make more financial sense to continue renting a vacation property as needed and use your savings for travel or other financial goals?
Create a list of your objectives and share it with your financial advisor and real estate agent. Your financial advisor can help ensure your plans fit with your current financial situation, while your realtor can help narrow your property search.

Financing your property

Most financial institutions offer financing programs for vacation properties and/or second homes. Depending on the type of property you want to buy, you may be eligible to obtain financing for up to 95% of its value, subject to approval by a mortgage default insurer.

Your primary residence is a good place to look for financing. By tapping into your home equity (its current market value less your outstanding mortgage) you may be able to borrow at a lower rate than if you took out a typical loan.

Factor in all costs

Besides your mortgage and closing costs, you will need to plan for repairs and ongoing property maintenance. Don't forget about any renovations (such as winterizing your vacation retreat) you plan to make, along with the costs of water supply and road access. Recreational toys that can enhance your vacation experience, such as boats or jet skis, also need to be budgeted for.

Financing tip. If you won't be using the property year-round, consider renting out the property to help pay for carrying costs and expenses. Be sure to save all receipts associated with maintenance, utilities, and insurance, as you may be able to claim tax deductions if you are drawing income from your property. Bear in mind you'll still be responsible for keeping the property clean and well maintained.

Draw on local expertise

Local real estate brokers are a valuable resource who can help you in your planning and budgeting. They understand the market and can give you good estimates on property taxes and annual upkeep. Strict local and provincial rules regulate land use and development. Local expertise can help you learn about zoning and other legislation, such as restrictions on renting, construction or landscaping, that might affect your goals and budget. Check with local authorities to get the appropriate permits and to ensure your plans won't damage sensitive habitats and ecosystems, such as shorelines.

Financing tip. Pooling your funds with family or friends to purchase a recreational property is one way to reduce the financial burden of ownership, as long as you're prepared to work out schedules for share use and maintenance - preferably in writing. A lawyer's advice can be invaluable in helping work out all potential issues that may arise from shared ownership.

Like any important decision, it's a good idea to do your homework if you are considering a recreational property. Your financial advisor, local real estate agent, and lawyer are good sources of advice and information.