Financial tips for buying a recreational property

According to a recent Royal LePage poll, four Canadians will be seeking recreational properties this year for every one owner who plans to sell.

The scarcity of supply, low interest rates, increasing interest from U.S. buyers, and the perception that property is a "safe haven" from volatile stock markets have combined to put upward pressure on prices. For many potential buyers, creative solutions are called for. Click through the links below to find out more.

Financing your vacation retreat

Whether you're interested in purchasing a lakefront property or a ski chalet, coming up with the funds can be tricky. Lenders typically view loans on recreational properties to be riskier than home mortgages, and may insist on a larger down payment or charge higher interest rates. But there are some strategies you can employ to help make your dream a reality.

Remortgage your home. Your primary residence is a good place to look for financing. If your home is worth more than your outstanding mortgage, you may be able to tap into some of its equity and raise extra cash - up to 90% of the present value. You could also consider taking out a second mortgage on your home; however, rates will probably be higher than on your first mortgage.

Resourceful financing solutions

Along with rising prices, potential owners of recreational properties will have to budget for renovations, maintenance, and property taxes.

Renting your property. If you anticipate that you won't be using your vacation property for all the summer months (or if you intend to purchase a winterized chalet near the ski slopes that won't be in use during parts of the season), you might consider renting out your property to help with the carrying costs.

The Royal LePage Poll also revealed that 40% of potential buyers plan on renting out their property for part of the year. Having occupants when you are not there may also help to discourage thieves and vandals.

Tip: Be sure to save all receipts associated with maintenance, utilities, and insurance, as you may be able to claim tax deductions if you are drawing income from your property. Renovations also increase your capital base and can lower potential capital gains when and if you decide to sell.

To determine a fair rental price, ask around or check into classified and Internet listings and community bulletin boards to get a sense of what others are charging for similar properties. Listing your property with a rental agency can help you market it.

Don't forget that if you decide to rent out your home away from home for parts of the year, you will be responsible for ensuring that it is clean and habitable.

Tip: If you anticipate being out of the country when renters occupy the property, you might consider hiring a manager who can take care of maintenance and repairs.

Family ownership. Another way to reduce your financial outlay is to consider a joint purchase with family or friends. A parent may consider buying property with an adult child who does not have a principal residence. If the property is in the adult child's name, this can help to save on capital gains taxes if you intend to sell during your lifetimes.

Siblings may also consider purchasing a property together. On the face of it, this may seem like an easy way to make a recreational property affordable, but potential problems can easily arise.

The most obvious is the use of the property - particularly as Canadian summers are short. Other things that should be worked out well in advance - and preferably put in writing - are who will be responsible for maintaining the property (work and costs) and succession planning.

Tap into local knowledge

Local real estate brokers are a valuable resource who can help you in your planning and budgeting. They will understand the market and renting conditions and can give you good estimates on property taxes and annual upkeep.

If you are planning to buy vacant land on which to build a dwelling, they can also help you check into any building restrictions and local zoning regulation.

Ask yourself the tough questions

With the recreational property market so tight, it pays to be honest with yourself and your family about what you really want. How often do you plan to use the property? Can you afford the purchase price and maintenance costs without having to compromise on the other things you want out of life?

In your planning and budgeting, you may find that it makes much more sense to rent for a month during the summer season, and still have enough left over for travel and other leisure activities. But if your dream of owning a recreational property is still burning bright, sit down with your mortgage lender and find a way to make it happen.

Ready to talk about how best to finance a new recreational property? Your nearest mortgage specialist can help you find a creative solution.

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