Yahoo Finance Avoid the temptation of investing in a cottage instead of a condo: expert
Housing markets may be cooling slightly in major Canadian cities like Toronto and Vancouver, but as we enter the hot summer months the talk turns to weekend retreats.
Lake house. Cottage. Chalet. Whatever the word for it is in your neck of the woods, one thing stays constant: the lure of a vacation property is undeniable.
There are entire HGTV series dedicated to finding a dream second home. But what about making it Option A?
It sounds like a great way to game the system: skip the sky-high housing prices in the city in favour of renting, and invest your money in a piece of land in the country.
But is it really a sound investment?
“Talk is cheap,” says Tsur Somerville, director of the University of British Columbia’s Centre for Urban Economics and Real Estate.
“You hear about it every time stuff gets crazy,” he said, adding this is the third iteration of the “rent in the city/own a cottage” craze he’s seen in his tenure.
Now with the growing popularity of home-sharing websites added to the mix, the plan sounds even more tempting.
Surveys show young people in particular rank home-share options, like Airbnb and Home Away, as top vacation selections, often opting to use these sharing economy options over more traditional travel routes, like hotels.
But Somerville cautions that it’s not a quick fix.
“There are very few people who can make this work and who couldn’t buy in the city,” he said.
“This is like buying something that you then don’t use,” he said. “From a financial standpoint, you’re likely to be better off buying a condo you don’t want to live in but there’s solid rental demand.”
It would be natural to assume that since millennials are flocking to these properties as renters that the market can support another shared cottage. But Somerville cautions it is not a “uniform demand” like there would be for a condo downtown, for example.
It won’t be booked every weekend, and the time it is booked is likely when you want to be there enjoying your investment.
“You have this great cottage that you get to go November and February. You’re not going in July and August because that’s when you have to rent it out.”
On top of that, the tax system benefits owning the property you actually live in, he said. For example the capital gains from selling your principal residence do not have to be reported on your income tax return. Not so for vacation properties.
Furthermore, when it comes time to sell the property you might have a harder time finding a buyer, especially in tougher economic times.
“It is a dramatically riskier market,” he said. “Their demand is much more cyclical because it’s a luxury product.”
On top of that, when baby boomers, the primary owners of vacation properties at the moment, start offloading their stock when they can no longer enjoy it in a few decades time, the market could be flooded with new stock.
Ultimately he advises not to think of a vacation home as an investment, but as a consumption.
“It’s not that this is a horrible thing to do, it’s just that if this is how you thought you were going to be able to fit [in the market] it’s not really going to help you there.
