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Experts Advise First-Time Homebuyers to Avoid Recreational Properties

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Experts Advise First-Time Homebuyers to Avoid Recreational Properties
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Real estate industry experts advise Canadian first-time homebuyers not to put their money into a recreational property over a residential one.

The main reason behind the advice is that vacation properties are more of a lifestyle choice rather than a good investment. Buying such a property is usually done by someone who is looking to spend time with the family in a relaxed environment. The problem is these properties often don’t appreciate at the same speed as other urban homes do. Tom Davidoff, an economist at UBC’s School of Business told Cottage Life:

“In places like Toronto and Vancouver, if you’re locked out of buying in the city, it could look like it makes sense to buy a vacation property so that you have some real estate in your portfolio. But a home in Kelowna isn’t the same kind of investment as a home in Vancouver, so it’s not a terribly effective way to hedge the market.”

However, many Millennials who are finding the housing markets in their cities too unaffordable have been looking to buy recreational properties rather than residential homes.

Yet, Millennials are not the first generation of property buyers to do so. Data shows that many Baby Boomers rented in the city and purchased vacation properties for their weekends away too. In some regions, the commute from the vacation property into work can be the same as from a suburban property.

Although seen more like a trend than a strategy, buying a vacation property has become popular among homebuyers again. Rudy Nielsen, head of Niho Land & Cattle Co told BC Business Magazine that 2019 has so far been one of the best years for purchasing recreational homes.

Challenges to Vacation Property Purchases

Those looking to get a mortgage for a recreational property may find it more difficult to procure one. Banks may be less likely to offer favourable rates to first-time homebuyers just getting into the Canadian real estate market and buying a property that usually does not appreciate as quickly as a home in the city would. They may ask for more collateral or a higher down payment than other property mortgage loans would require.

Rob Regan-Pollock, vice president of the B.C. Chapter of the Canadian Mortgage Brokers Association, told BC Business Magazine:

“A cottage on a lake in the middle of nowhere: that’s when the lenders start to apply different criteria. If it’s a non-continuous foundation, or a wood or block foundation, lenders are typically not interested. They want to make sure the economic life of a particular dwelling is going to exceed amortization by five years”

He also noted that a 35% down payment would not be an uncommon request by lenders.

Another hurdle is having your vacation property insured. Most companies will cover recreational properties as part of a bundle. If it is your only property, insurance rates may be higher. Depending on the location and use of the property, insurance companies may be concerned that the home could be neglected if it is too far away and not visited often enough.

Then there are the tax rules. The Canadian Revenue Agency has very specific rules on vacation property taxes, especially if you rent it out at any time during the year. Posting it on Airbnb, which is another popular choice by vacation homebuyers, could change its status from cottage to rental property. Plus, any money you earn from renting will be considered revenue and you will need to claim it as such on your next tax return.

Vacation Property Purchases in the U.S.

When it comes to buying an ideal vacation property, a good percentage of Canadians look south of the border for real estate. There are over 500,000 Canadians who own property in Florida alone, BMO has reported.

Canada is one of just five countries that make up 50% of the international real estate purchases in the U.S. Statistics show that Canadians bought over $10.5 billion in U.S. property in 2018 alone. The majority, according to the National Association of Realtors, paid cash for their home and 40% stated the property would be for vacations. When it comes to specific destinations, international buyers tend to opt for warmer states like Florida, California, and Texas.

Regardless of where you buy, it is important to keep in mind that vacation homes are a risky purchase for first-time homebuyers. They are less likely to appreciate as quickly as a residential home and can sometimes be difficult to sell. Moreover, there are many more hurdles to getting a mortgage for a recreational property and other challenges that homebuyers will need to overcome.

 

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