Does it make sense to buy a vacation home?
Whether the sun is shining or the snow is blowing, there’s always somebody grappling with the same question: Does it make sense to buy a vacation home?
On the cost side, property taxes, condo fees, and utilities, as well as maintenance and insurance on a property, can easily add up to 5 or 6% of the home's value every year. Expect a big insurance premium, for instance, because the very things that make a vacation home appealing — proximity to water or mountains, distant from civilization — also make it riskier to insure. And, of course, there's the cost of getting there.
Even at today’s rates, holding a 20-year mortgage for the duration will likely cost another 4 or 5% per annum. Plus, the down payment or even an all-cash purchase will add still more to that in opportunity costs, assuming you believe that there are actually still some other investments that produce positive returns.
Sure, if you rent your property out periodically, you can get make some money and get a partial break on the property tax and mortgage interest. The actual benefit will vary with your tax bracket, of course, and you’ll still have to declare the income.
All of which means the annual after-tax cost of the average vacation property is likely in the 9 to 10% range.
On the plus side, there’s no question that real estate does tend to grow in value over time. And, in some areas, that growth has actually translated into double digit returns. But can this continue?
If you spend 9% a year and get long-term gains of even, say 5%, that leaves a 4% gap — which is a good approximation to compare to the cost of renting periodically instead.
Of course, a rental isn’t nearly the same as having your own place — which is why fractional vacation properties are popping out everywhere. On that note, here’s a cost comparison chart to ponder, with the caveat that it doubles as a sales tool for part-time ownership.
What’s your view on the financial merits of a second home?
By Gordon Powers, MSN Money
Posted by: Steve | Aug 24, 2009 5:05:46 PM
Don't do it. Especially now.
If you feel that you MUST own a property just wait till the interest rates rise then these properties wil collapse in price. Shouldn't take long, just wait till the stimulus money runs out.
Posted by: BR | Aug 25, 2009 11:54:46 AM
Not sure I agree Steve. In the case of lakefront property (of particular interest in Ontario) it is definitely a limited amount. They're not making anymore. Especially if you want to be on a big enough lake to take a boat out for a ride. I own a cottage in Haliburton, and while prices have adjusted down or flattened recently, they are showing signs of creeping back up. Cottages will always be in high demand. And don't expect interest rates to go up anytime soon. The Bank of Canada has been pretty clear about saying that interest rates aren't going anywhere for a year. When and if they start to go up, they will creep up, and at the current rates, it's a long way to even a 5% Prime Rate, an otherwise historically low rate. Yes, usually rises in interest rates signals lower prices, and higher prices go with lower rates. But in the current times, we have both lower prices and incrediably low interest rates. What does this mean? It's a perfect time to buy property - any property, including a vacation home. And no, I'm not a real estate agent.
Posted by: Lee L | Oct 10, 2009 11:04:46 PM
A €350,000 freehold property in the south of France for €20,000 and not a penny to pay for 25
years plus a guaranteed income over that period plus 4 weeks free annual usage including free golf. That is what was offered from May to September of this year. Are deals like this available every day? of course not, but they do exist. Like every investment you have to look around and be patient.
Bottom line is you must invest, savings isn't going to get you past inflation and taxes. You also have to be comfortable with what you invest. Most important, ask questions and talk to people. Sales flyers don't come to your door like the local grocery store.
Posted by: Bert | Dec 1, 2009 8:26:51 AM
I was just looking to do exactly that. I just vacationed in texas and thought that I should look into perhaps purchasing a detached home. The prices are incredible, the dollar is strong, and the interest rates are low- when would be a better time to do it? If I wait too long, one of these factors is bound to change, which means a potentially higher cost for me. I want to eventually retire to this same home. Is it not an investment in my future to start now? Is real estate always a wise investment when you can buy low? I am confused as to why any buyer would be discouraged from buying now.
Posted by: Sammy Joe | Dec 29, 2009 10:41:07 AM
I bought an ocean front property only ninety minutes from my home, in the city. In my back yard, I have almost one kilometer of pristine white sand beach! We come down here all year round, which makes it a worthwhile investment and got me into the vacation property market, twenty years before I retire. So, we get to enjoy it now and I am increasing my equity instead of relying on the stock market to perform for me.
It just made sense to get something now for 250K and make monthly mortgage payments instead of doing RRSP's that might be worth nothing in twenty years. Otherwise, based on inflation, and the fact that I bought one of the last places down here that is allowed on this National Park beach, I no longer have to come up with probably 750K plus when I'm sixty. We can just sell our city house and move down here, rent free, full time. I encourage everyone to look at this option instead of socking their money into RRSP's and the stock market for the sake of a tax deduction now. What is that worth if it underperforms and gives you even less than what you put in? I only started to make money in my portfolio after I fired my "Investment Advisor". Never again!! I'm so glad I stopped giving him new money a few years ago, when he was underperforming and saved for this place instead.
Posted by: ted wronski | Dec 29, 2009 9:11:02 PM
Cottage property is not gone down as dramatic as City based property.Cottage property as the demographics get older will be in GREAT DEMAND. The Bulk of todays population is at the retiring stage, guess what happens. Cottage property historically has outperformed City Based Properties. The declines are shorter and the increases are greater and longer.Property located in various areas such as Fenelon Falls, Burnt River Areas( Especially Burnt River Area) is a un discovered GEM. Cameron lake and Balsam lake are down River . This provides an Enormous advantage with out having the costs of Higher taxes and etc. on the LAKES. Burnt River is the GEM of the Kawarthas, waiting to be discovered. Property values have yet exploded like the big lakes, the area is some what of disrepair, some great properties some not so great. This is what you should be looknig for , Areas yet to be discovered. Cottage property will have the next boom as we all get a little older. $$$$$$$
Posted by: ted wronski | Dec 29, 2009 9:19:09 PM
Buy Cottage property now , since you think no one wants it . Fenelon Area is a Gem and the surrounding area. Check out the Burnt River Area on Northline Line RD. Some Big homes now being Built. New Subdivision going in with More BIG HOMes, the area is having a mini boom. And, Futher develop,emts are coming. NO NO NO I am not a real Estate agent or have any special interst in the area other than owning a Cottage on Cedar plank Rd. Which Was purchased 4 years ago and has so far increased about 60,000 Dollars , thank you very much. So tell me is Cottage property going Down.This is not the greatest of areas But thats ok because the other homes, the BIG HOMES ARE GOING TO MAKE MY PROPERTY INCREASE.Also, the area is now becoming more popular since the BIG lakes are way, way way to costly to buyCheck it out and call me to tell me the great news and how some guy on the net made me a nice nest egg for my retirement. Thanks and HAPPY COTTAGING> Buy $$$$