How to Buy a Vacation Home: Evaluate Loans, Choose a Location, Build a Rental Strategy

Posted by Dave Kotler on Wednesday, November 30th, 2022 at 1:02pm.

Vacation Home Buying Guide

Considering buying a vacation home? If so, there are plenty of factors to consider before taking that financial (yet potentially fruitful) leap. After all, vacation homes are different from first homes. A homeowner's application will be reviewed differently by lenders. They will likely have a much better experience the second time around if they have been able to repay their mortgage steadily and consistently.

The responsibility of owning a vacation home cannot be underestimated, regardless of the purpose for which it was purchased. Some Canadians take steps to invest in property—like a single-family home or a condo, for example—to create passive income streams. For others, a vacation home away from home is all they need. Vacation homes for personal use and rental purposes have several differences. Here are some factors to consider during the process of buying a vacation home.

Evaluate Down Payments and Loans for Vacation Homes

Owning a vacation home has financial implications. Having another home means:

  • Taxes on another piece of property
  • Upkeep and maintenance of a second home
  • Repayment of a second loan
  • Upon resale, the owner must account for capital gains or losses

Canadians consider secondary residences to be taxable assets as well. Therefore, the owner should also consider long-term estate planning when making a purchase. Among the most imminent costs are mortgage repayments and property taxes, down payments required or loans needed for purchasing a vacation home.

The owner will likely have to deal with some paperwork when the ownership of their vacation home eventually changes hands. Whether they sell their home during their lifetime or pass it on at the end of their life, a legal representative must file a deceased tax return with the CRA, at which point the estate or whoever inherits the property must pay any taxes owed. For a vacation home purchase, the buyer must ensure they are fully prepared to make a substantial down payment.

Choose a Popular Vacation Destination

It takes a lot of planning and time to find the best place and budget for vacations for most people. The location of the vacation home becomes even more important when considering purchasing one since all the homeowner's family vacations will take place there. Additionally, choosing a popular vacation spot can increase the homeowner's revenue potential. Vacation rentals can generate more revenue than long-term rentals or traditional real estate investments. Hosts can adjust their pricing throughout the year if their vacation rental is well-furnished.

If the homeowner intends to rent the vacation home, they should look into the rental market in their desired location. Check to see if the area has many rental properties. Investments in vacation rental homes may be profitable if there is a demand for them. Homeowners should aim for at least a 15 percent ROI (return on investment) when considering renting a vacation home, although closer to 30 percent would be preferable.

Decide Between Renting or Not Renting

Pros and Cons of Renting Out Your Vacation Home

While the revenue can be enticing, the workload can be challenging. Here are some pros and cons of renting out a vacation home:

Pros

Vacation rentals can be excellent write-offs if the homeowner speaks with their accountant about the tax implications. It is easy for owners to deduct many expenses — including depreciation, loan interest, HOA dues, private mortgage insurance, furnishings and supplies—from their income. Owning a second home involves many costs, which are generally not refundable unless it is rented out.

Homeowners can offset the cost of owning a vacation home by renting the property out. As a homeowner, one can still take advantage of their own vacation rental.

Cons

Things wear out over time. If the cabin needs some reinvestment for renovation or repair, be prepared to do so. Furniture and linens that wear out should be replaced. The homeowner will have to do some work. Any personal items must be locked up before and after tenants arrive and depart.

Renters may not always treat the cabin with the same care even after careful screening.

Make a Plan for Property Maintenance

A homeowner may be surprised at how easy it is to maintain their vacation home from a distance. By creating a property maintenance plan, you can protect and maintain a vacation home while you're away, which benefits both renters and non-renters because it ensures the safety of the property year-round. If the homeowner lives far away from their vacation home, here are some ways to maintain it:

Make Sure a Security System Is in Place

If one owns a vacation home, installing a security system is recommended. The options are virtually endless regarding front door alarm systems, cameras and window alarms.

Monitoring the home's activity will allow the homeowner to ensure that all is secure while they are not physically on the property.

Make Use of an Owner's Closet

Any personal belongings should be kept in a designated owner's closet if the homeowner regularly has guests visiting their vacation home. A waterproof bag should be kept inside the owner's closet to protect important documents.

Make Sure Appliances Are Maintained Regularly

Last but not least, make sure all of the appliances are maintained regularly. When the homeowner plans to be away from their vacation home for months at a time, ensure the appliances are maintained. Preventative measures are always a better alternative than replacing an entire unit when it breaks down.

Be Mindful When Buying a Vacation Home

There are many benefits to owning a vacation home like a condo in Canada. One can enjoy a highly personalized vacation experience by taking advantage of the vast space Canadians have access to. Concerning finances, a homeowner must understand the implications of owning a vacation home, no matter their goals. Doing so will have homeowners ready to enjoy their vacation homes to the fullest!

Dave Kotler

Leave a Comment