VACATION PROPERTY Is It A Worth while Investment?

DMM DEPARTMENT

MB Enterprises

Is it Worthwhile buying a vacation property, is a major question that everyone needs to ask after the effects of the Pandemic, COVID-19 in the Real Estate sector in Canada. It is always considered as a good time spending with the loved ones and with close family members. However, the question that needs to be asked is, IS IT A GOOD DEAL?

The benefits of owning your own vacation property in form of a small cottage, or a nicely located home is always a beneficial idea in terms of enjoying the benefits. It will definitely help in providing a quick weekend charge for the next week, and getting relaxed from the busy schedules, and a full of hassle life. From an emotional point of view, it’s always considered as something you can’t miss. However, what needs to be pondered are the financial implications, i.e. from a financial point of view.

As an example we can presume that the Purchase price is $500,000. It doesn’t matter you use cash, or mortgage/ home equity, or a line of credit. Furthermore, a combination of payments, there are some other costs that needs to be considered. If for instance you have purchased it on money that you borrowed, despite the current mortgage rates being 2%. Therefore, in the long run, the interest rates are most likely to go higher. On a property that’s worth $500,000 there will be an initial cost, i.e. 4% or $20,000.

THE FINANCIAL PERSPECTIVES:

The financial perspective in this regards says that it might notbe a good idea to invest in times of on-going financial crisis that relates heavily to COVID-19. The costs can be even higher for those properties or cottages that are old, this includes a property with amenities and high fees.

What’s the Return on Investment for owning such a property, which can also be called as a cottage or an ideally located home far from the busy city? If we keep in mind the Bank of Canada’s 2% inflation target, arguments say a more reasonable long-term growth for real estate is 2% to 4%. The vacation property purchase might not be the best choice if financially manipulated and calculated. The best answer that the buyer must ask himself or herself is that can you rent a comparable property for less than $20,000 per year. However, there are some Non-Financial reasons that are associated with the purchase of vacation property, and these reasons are related with leisure, luxury and entertainment.

Renting the property after buying it for some future income can reduce the net cost automatically. Hence, it can make the purchase more fiscally responsible. These are the tax implications if you do this, termed as a ‘Bad financial decision’.

Secondly, the rental income is taxable, and on the other hand, the renting out of a vacation property will also result in providing some tax deductions. Ironically, these deductions are based on the proportion of the year that the property is available for rent. Even, if you rent it for a period of six months

after using it for six months, than half of your eligible expenses will be tax deductible. Hence, the decision is not worthwhile from a financial perspective, and can result in losses that can damage your long term financial stability. IS IT A GOOD DECISION?

Therefore, its best to do some basic math involved, using your own numbers try to figure out the net cost of the property. Also, if you rent something comparable for less, only consider the option as the best one if there is affordability without compromising on other financial goals. Your basic and sustainable financial goals mustn’t hurt your decision to buy a vacation property, as your Pay-back period can considerably rise for such a non-lucrative investment. However, when the financial crisis is over, and tourism rises, the decision can turn out to be a good one. This also depends on your mortgage term, costs, & percentage.