Is it Worthwhile buying a vacation property is a major question that everyone needs to ask. Especially, after the effects of the Pandemic, COVID-19 in the Real Estate sector in Canada. With family members & loved ones, considered as good time spending as vacations. 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. Hence, it 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. For family get-to-gathers, and relaxations, the holidays are needed for a busy & hectic schedule. Something that you can’t miss or ignore, as taken from an emotional point of view. 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 need 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 regard says that it might not be a good idea to invest. Hence, in times of the on-going financial crisis. A sympathetic situation that relates heavily to COVID-19. The costs can be even higher for those properties or cottages that are older. Hence, 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. Apart from other reasons, some Non-financial reasons are also associated with the add-on. These are associated with the purchase of the vacation property. Hence, these reasons are also related to leisure, luxury, and entertainment.
USING THE PROPERTY AS RENTAL PROPERTY:
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 then 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, it’s best to do some basic maths 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.