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Is buying a vacation home right for your client? A look at the pros and cons

The COVID-19 pandemic has many Canadians re-evaluating their living situations. The desire for more outdoor space, being closer to nature and more square footage has contributed to a surge in demand for vacation homes. Since more Canadians are working from home, lakefront cottages, cabins in the woods and other rural properties have piqued the interest of many professionals, as they consider investing in space away from the hustle and bustle of the city. While vacation homes offer a number of benefits, they also come with several challenges. Here are a few pros and cons of buying a vacation home you can share with your clients.


Property values

Property values continue to rise 

Buying a vacation home has always been considered a good investment, but indicators have never been stronger that recreational property values will continue to grow. Although the recreational market is generally active in the warmer months, recent trends have proven that the continued frenzy is here to stay, even through the typically slower winter months. The median price for residential non-waterfront property sales in Ontario’s cottage country reached $635,000 at the end of 2021, up 44.8% compared to the previous year. Waterfront properties also saw a 25.7% rise to $1.05 million on average over that same time. In Western Canada, demand has pushed prices of non-waterfront properties up in areas like Canmore by 26% since 2019, and home buyers are paying about 43% more for waterfront properties in Manitoba compared to 2019. 

Lucrative income source

According to vacation rental company Vrbo, almost half of vacation property owners said that income potential  was their main motivation for making that investment. As families across Canada explore new ways to create staycations, short-term rentals have grown in popularity. Airbnb hosts report making over $900 per month, depending on the season. In some cases, income from a vacation property may cover a big chunk of mortgage payments or other property management expenses. 

Retirement planning benefits

A second property could initially be used as a rental vacation home that eventually transitions to a full-time retirement residence later on. Buying a rental home allows the owners to build equity into retirement. At that point, your clients can sell their primary residence and put that equity toward the mortgage of the second property. Encourage your clients to discuss with a financial planner how a vacation home can help them build long-term wealth. 


Maintenance costs

The first thing to consider about owning a vacation property is the cost of maintaining it. If there are projects or repairs that need to get done, it requires the property owner to either do it themselves or supervise the job. This could involve commuting to the property, and can often entail unexpected costs as well. If frequently being on site isn’t possible, it might mean paying a property manager to maintain it, which can add additional costs to your budget. Additionally, taxes on a second property can be higher than originally expected depending on the location, especially for waterfront properties. 

Managing a second home 

A vacation home is an extremely hands-on investment. If it’s your client’s intention to rent their vacation home, whether short-term or long-term, ensure they have considered the additional responsibility. With short-term rentals, homeowners will have to manage bookings, communicate with guests, and manage the upkeep between stays. Homeowners will also have to prepare for possible damages and liability. 

It can be time-consuming and stressful to manage an additional property. Particularly during a pandemic, it’s important to consider whether owning a second home is worthwhile given the added time, energy and costs required. 

Financing can be complicated

Qualifying for a mortgage on a second property is often more difficult than the first.

It often requires a larger down payment and typically carries a higher interest rate than a mortgage on a primary residence. A higher rate means a higher monthly payment and more interest over the duration of the mortgage. 

After careful consideration, advice and planning, if your client remains interested in purchasing a vacation property, private lenders like CMI offer flexible mortgage solutions, even when a client might not qualify for financing with traditional lenders. Private lenders can also help clients come up with shorter-term financing to make up the down payment, or use equity from a primary residence to fund the investment property. CMI may also be able to provide a blanket mortgage, so clients only have to make one monthly payment, instead of two. 

Vacation properties are a great way to build wealth, but it’s important to consider all the tradeoffs as well. As a trusted adviser to your clients, you are well-positioned to help them navigate these scenarios, and plan the best way to approach this big decision. 

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