Case Study: Buying a Recreational Property
Oct 16, 2024
Having a recreational property is really something special. Homes are where parents parent, but at the cottage/cabin/camp, parents are “way more fun!” So, it’s not a surprise that many families make an effort to find and purchase a recreational property as it becomes the place to run away for weekends and holidays with friends and family. The trick is how best to afford one and enjoy it without financial strain.
The reason I bring this up is that during and since COVID-19, recreational properties have been a consistent topic of conversation with clients. Whether to buy one, or how best to adjust financing as they go. From this, I have a handful of key things for you to keep in mind.
#1 The Down Payment
There is no rocket science here: you will need a sizeable down payment. In many cases, you may need more than 60% down before the bank will finance anything at all. Banks are very reticent to finance mortgages in rural areas because there is very little market activity, and building quality can be a bit more lax. Thus, in these cases, we use the equity in the client’s home by increasing the mortgage to purchase the recreational property 100%. Either way, before you fall in love with a property, know in advance how you will finance it.
#2 Cash-Flow & Costs
Not surprisingly, carrying a second property comes with its own costs … additional mortgage payments, property tax, insurance, maintenance, etc. Ideally, the property can offset these costs by generating its own rental revenue when you are not there, as we have seen successfully in places like Whistler. Whatever the net costs, just ensure they work within your cash flow.
If you have rental revenue from the property, this opens your ability to deduct a portion of the property’s carrying costs. Thus, if you rent the property for 25% of the year (one week per month) you can deduct 25% of any mortgage interest, property taxes, insurance, etc. To do this, we need the recreational property portion of the mortgage to be a debt of its own. This is to easily account for the deductible interest costs each year. And at each recreational property mortgage renewal, we move “excess” equity against the home mortgage … a primary residence mortgage interest is not deductible, but interest from mortgages on “revenue-generating properties” is.
#3 Surprise Costs
For me, there are two. The first is to know that your homeowner’s insurance will be significantly higher for a rural recreational property. The largest reason is a lack of a nearby professional fire department. The second reason is there will be long periods of time when no one is in the building, so if something breaks, it can’t be dealt with quickly … think of things like a burst hot water tank. And often, there will be a clause that the property needs to be checked on every 60 days. Altogether, it is not uncommon for recreational property insurance to be twice as expensive as your home insurance.
This leads me to the second “surprise cost”… time. Maintaining a rural recreational property will be primarily on you, the owner. Everything from cutting grass and hedges to maintaining the septic system to winterizing the building in the fall. In the city, it is easy to hire people to do these things for you, but it’s much more difficult to find these services in rural areas. So, just be sure to budget your time accordingly. I don’t share this to scare you, but just to be sure you are ready for the effort required.
#4 The Hunt
One of the hardest things can be finding the right place … both the where and the what. Each property comes with its own set of factors. Ocean or lake? Mountains or river? Drive-in access or boat? Rustic or new? Cleared land or forested? Close to town or out in the sticks? On the grid or off the grid? The reality is, you won’t know what your favourite is until you try them. My best advice is rent properties in all the places you’re considering. Go spend a couple of weeks living that lifestyle and see how you like it. It might take a couple of years, but it will be fun “research”! Then, when you find the right “neighbourhood,” go back a second time and get to know the people. I share this because most recreational properties change hands before the public even knows they’re for sale. And sellers are much more interested in selling to someone they know will keep the cultural landscape intact, rather than “a new person from the city!”
#5 The Pay-Off
I often ask people with recreational properties, “Where on the commute do you feel the stress dripping off you?!” It always brings a smile! When done right, the recreational property will provide an invaluable list of great experiences, fun family time, and priceless memories. And there will always be a trigger point where stress falls away!
I share all of this with two hats on … the financial advisor hat and the hat of an owner of a cabin on Keats Island. I was a child of the Keats Island cabin experience, and for the last 17 years, I’ve been the parent on our own property. The time spent with family and friends at the cabin puts a great smile on my face! So, I share a lot of the advice above from first-hand experience.
But with all of this in mind, it is important to know that a good investment is one where you can get your money and profit back in the future. As a result, a good recreational property is a bad investment. Why? Because if you ever sell it, your kids will disown you!
Why do we plan?
Knowing where you are translates into knowing where you're going, and we hope to provide every client with the trust and confidence to navigate through the waters of their financial lives.
Learn More
