Buying a Vacation or Investment Property

Sales of vacation homes soared during the pandemic, and with remote work options available for many people or more families seeking vacation getaways outside of the traditional hotel, they remain popular as both an asset and an investment. Whether you’re thinking of buying something exclusively for family use or hoping to earn some extra income from renting it out, here are some things to ponder before you buy. 

Consider your mortgage strategies

Investing in another property for most will mean taking a look at mortgage options. If you’re going to finance your purchase with a mortgage, the biggest decision is between fixed and variable rates. This can be particularly complex, because it’s an unusual time for both borrowers and lenders.

The gap in rates between variable- and fixed-rate mortgages is at a historically wide level, making variable rates more attractive from a cost standpoint.

With high inflation in recent years, the Bank of Canada has tried to curb that with higher interest rates. While that has now changed with the last rate update in June 2024, you’ll have to weigh the risks when choosing between a variable- or fixed-rate mortgage.

One tip that can work well for borrowers who are looking at variable rates: use a mortgage calculator, figure out what your monthly payment would be if you went with the current fixed rate, then set your payment at that level. That way, you’ll give yourself a buffer against changing rates and you’ll pay your mortgage down faster for as long as the gap between variable and fixed rates exists.

Be aware of additional costs

With the popularity of vacation rental home websites such as VRBO and AirBnB, you may be thinking about earning some extra income by renting out your property when you’re not using it – or even using it strictly for income purposes. If so, be sure to account for some of the associated costs and fees.

Consider the time and cost to clean and care for the property between guests, and general maintenance overall. If the property is far away or you would rather outsource this job to a property manager, you’ll need to account for this expense when calculating your forecasted return on rent.

Property-management fees vary widely amongst providers and by the amount of revenue your rental generates. Before making your purchase, make sure you have an estimate and are clear on the fee structure.

You’ll also need to cover for insurance costs. Renting a property to vacationers is likely to involve a higher premium or even a separate insurance policy. There are some policies specifically available for a property’s short-term rental aspects or can be tied to your existing policy, for example. Check with your provider and make sure you have the right insurance – the consequences can be heavy if tenants damage the property and leave you with a hefty repair bill.

When selling a vacation property, bear in mind that vacation homes don’t qualify for the principal residence exception (PRE) that shields your main home from capital-gains tax upon sale. As of June 2024, the federal government changed the structuring of capital gains taxes. Annual capital gains up to $250,000 are taxed at 50% of the value but for any capital gains over $250,000, the rate increases to 66.67%, meaning you could be facing a hefty tax bill on the sale of your property. It is wise to discuss this matter with a tax or accounting specialist so that you are prepared with a strategy that suits your needs.   

Protect your property when it’s unoccupied

If you and your family will be the only users of the property, one of your biggest priorities will be safeguarding it from intruders, wildlife or water damage when no one is there.

If the property will be vacant for long stretches, you’ll want to inform your insurer, as many have requirements to maintain your coverage while you’re away, such as having someone check on the property at specific intervals and/or ensuring the water is turned off, pipes are drained and the heat is left on, for example.

The good news is that the smart-home trend has given us many affordable ways to monitor our properties. You can buy Wi-Fi enabled cameras for a low cost, use connected water sensors to send you an alert if there’s a leak or a broken pipe and you can install smart thermostats to monitor and adjust for temperature and humidity. You can even buy Wi-Fi enabled light bulbs, switches and plugs to turn on and off from your phone, giving the impression someone is there.

Keep an eye on government policy

In response to the housing crisis, provincial, federal and municipal governments have brought in policies that may affect your purchase. For example, BC’s speculation and vacancy tax applies an annual surcharge for homes that aren’t your principal residence and are not rented for at least six months of the year in certain cities, such as Vancouver and Kelowna. And if you’re thinking of a future sale, you’ll have to be mindful of any capital-gains taxes that may apply (again, paying attention to how things shape up with the recent Federal Budget proposal). Keep up to date on the latest policies and how they might affect you. 

Seek trusted advice

Purchasing an investment property or vacation home can be both an exciting and complex undertaking. We can help. A BlueShore Financial advisor can work with you to ensure your dreams for a vacation or investment property can fit into your overall financial plan – so you can stay focused on relaxing in your new getaway or reaping the rewards of your investment.