In many parts of Canada, having a cottage is just a part of life. Whether it's to spend some time basking in the sun next to a crystal clear lake or to hit the slopes after a fresh snowfall, many Canadians could not imagine a life without a vacation home.
In fact, Royal LePage found in a recent survey that 35% of Canadians are even willing to cut their personal spending throughout the year just to have those treasured weeks away during the summer and winter months. But, as with many other types of real estate in Canada, elevated prices have pushed some people out of the market. Still, that hasn't deterred savvy buyers who understand real estate investing.
In fact, 51% of respondents to the Royal LePage survey indicated they're willing to rent their vacation home out to offset their expenses. Royal LePage President and Chief Executive Officer Phil Soper says two factors are causing this trend: technology and an undersupply of quality, waterfront recreational properties. First, regional rental websites have made it easier than ever for vacation homeowners to rent out their property, he says.
Before they'd have to place an ad in a local newspaper or work with a property manager to find tenants. But now they can just post an advertisement online. "All the risks are still there, of course, like strangers being in your property," Soper says, "but the actual marketing of your home and renting to temporary tenants has become much, much easier."
On the supply side
Second, Soper says dwindling inventories of recreational properties has played a large role in influencing vacation homeowners' decisions to rent out their properties. Longer commutes and heavier traffic congestion has increased the expenses of many cottage-goers both at the pumps and in personal time. So for the people who still make the somewhat arduous commute, they typically want to be right by the lake - a trend that has pushed waterfront property prices up steadily over the last 10 to 15 years, Soper says.
Recreational property inventories across the country have not been able to keep up with this growing demand and now many communities have a "chronic shortage," he adds. "You couple the two trends together - the ease of renting properties and higher expenses both in time and money - and it's driving people to look for different solutions. The most obvious one is to rent out their property part of the season," Soper says. But he stresses that investing in recreational properties is a "costmitigation strategy, not a pure investment strategy." That's because it can be fairly difficult to finance, maintain and sell recreational properties, he says.
Cottage investing 101
Real estate author and expert Douglas Gray agrees, saying investing in recreational properties only makes good financial sense for homebuyers who plan to be a primary user of the property. For those who choose to take that direction, Gray says the first and most important step before buying a property in a recreational community is to check the local bylaws. The municipality's minimum standards bylaw could be quite restrictive, certain neighbourhoods may be zoned differently and some communities may even require landlords to get a business licence.
"Recreational communities typically have stricter bylaws because the people who got there before you are trying to control their environment. Having a neighbour that's a party animal is the biggest fear of many people in recreational communities. That's why it's so important you check with the local government before ever buying."
Finding the right spot
Access is key. Getting a waterfront property that's at a maximum three hours from a major city centre will not only save potential headaches, but it will attract more prospective tenants. "That's the minimum criteria for me is it has to be a within a comfortable driving distance of where you live," Gray says. To gauge the demand of a recreational property in a particular area, Gray suggests doing a "concentric circle test."
Start from a major urban centre, and then see what recreational communities are within a maximum of a three-hour drive circling the city. "This is all part of your long-term planning, not only for your personal use, but also for those who may want to rent or buy your unit in the future," Gray says.
A year-round investment
Next, look for properties with year-round potential. For instance, Gray owns a recreational property in Whistler, B.C. While the snowy resort town is primarily known as a skiing and snowboarding destination, it's also a beautiful spot to vacation in during the summer.
Having a recreational property in a location with year-round attractions increases the amount of revenue that can be potentially generated by renting such a property out. But revenue generation is only one side of the equation, Gray says. Investors should also be looking for a property that has great potential for capital appreciation.
Finding the right home
Work with a real estate agent. Investors need to work with local Realtors to ensure that they're buying the right property for the right price, Gray says.
But just don't go with any real estate agent. "I really believe in the rule of five. Your primary research is to speak to at least five local Realtors because you're going to get an eclectic sense of what's going on in the area. It's really important to get that on-the-ground type of feedback before you invest from multiple professional sources." A good local Realtor can also help with determining fixed and variable expenses as well as rental rates in the community.
Buy a house, not a condo
Buy a house. Gray says investors should avoid recreational condominiums altogether. Buying a detached home is the better option, he says, because land values appreciate much more than a condominium and it allows much more flexibility in deciding what to do to the property. "You're going to get a better return on your money if you actually physically own the land underneath the property.
So for the best return over time, a single-family home is your best option. If you're looking at condos, like with any type of real estate, you're going to get less of a return, generally speaking, because you don't own the land." Getting financing for a second property for those who have enough to make a 25% down payment shouldn't be much of a problem at all. For those who don't, however, it could be a little trickier.
Financial institutions are sometimes reluctant to lend money to people who need high-ratio financing for a second home. If they do choose to lend money in these cases, it must be insured. The Canada Mortgage and Housing Corporation does offer insurance on high-ratio mortgages for recreational properties because the government has deemed that a vacation home is an integral part of people's lifestyles, Gray says.
But be forewarned the interest rate on the mortgage may be a little higher than normal, Gray says, because recreational property financing is influenced by a number of different factors. If the property is going to be rented out or is in an area serviced by a volunteer fire department, for instance, the rate would probably be higher. In any case, interested buyers should do their homework well in advance to ensure a recreational property makes not only a good lifestyle choice, but also good financial sense.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate
Investment Hot Spots:
Conestogo, Pitt Meadows, Peachland, Farnham, Rideau