Whether it's the thought of enjoying the sunsets on the deck or the soothing sound of water at your doorstep, owning a cottage is a dream for many Canadians.
With interest rates at an all-time low, that dream may be within reach. While many think of their cottage as a solid real estate investment, purchasing a cottage without doing all your homework can lead to serious headaches.
If you're contemplating buying a vacation property, it's critical that you weigh the costs against the rewards. The following are five questions that potential buyers should consider before diving in to cottage ownership.
1. How much use will the property realistically get? Canadian summers are short and schedules are busy. How much will the cottage actually be used? You may want to consider renting out the cottage to cover the costs and supplement your income. Earnings from renting your cottage will be considered taxable income but applicable expenses can be claimed to offset income.
2. Have you considered all the costs? Similar to purchasing a home, there are costs associated with the purchase of a cottage beyond the initial price tag. Additional costs such as taxes, maintenance, utilities, travel should all be budgeted before purchasing a property, even the price of gas to get you to and from the cottage. Be sure to budget for unexpected repairs like water damage or frozen pipes. You never know when you might need to fix or replace a leaky roof or face other costly repairs.
3. Have you shopped around? Popular cottage destinations can lead to overheated markets. Have you done your research and considered all your options?
4. Is it a good investment? Buying a cottage may mean that most of your savings are in real estate, does this make sense for you financially? Will the property appreciate?
5. What financing is available to you? Cottages often fall into one of two categories and not all cottages qualify for traditional mortgages. Type A properties include cottages that can be utilized all year round and have features similar to residential homes such as running water and central heating systems. Type B cottages on the other hand are classified as more rustic properties with minimal creature comforts and are often not winterized. The latter might not meet mortgage financing standards, so you may need to finance it with your own savings.
Remember that if your cottage is primarily used for your own personal use and is not your primary residence then it is considered personal-use property and you will be subject to capital gains tax when you eventually sell or dispose of the property.
Doing your homework before signing on the dotted line can protect you from the financial burden of unexpected expenses and help you determine if cottage ownership is the right financial fit for you. Whether it's a financial choice or a lifestyle choice, a vacation property won't be a restful retreat if you're struggling to keep up with the bills.
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