Buy your cottage and keep it, too

We just got back from our cottage on the Ottawa River.  It's wonderful there...  Wild windswept forest, water gently lapping onto the sandy beach (and mosquitoes the size of hummingbirds, but hopefully some long overdue hot dry weather will beat them into submission). 

I always know that summer's coming because the smaller members of our household start negotiating, "Can we go to the cottage tomorrow?  Why not?  Well, when can we go?"  And I find myself wondering, just how much school do those kids really need, anyway?

The reality of our situation however is that taxes, insurance, maintenance, and small renovations really tap into our cash flow.  In addition, with our busy jobs it's hard to get away as much as we would like.  So, like many people, we rent the cottage part of the summer.  It accomplishes two things: one, the rental income helps with our expenses, and two, we have wonderful renters who take care of the cottage as if it were their own, so that we don't have to worry that an empty cottage is just sitting there, vulnerable to thieves.

If you've been bitten by the cottage bug, or a vacation home is crowding in on your daydreams, you have probably realized another reality.  Nowadays, property prices have greatly increased in many of Canada's popular vacation destinations, making it a challenge to purchase the beach house of your dreams.

Some people choose to share these costs by renting, as we have, while others manage the cost through joint ownership with family or friends, or even some combination of the two.  However, before taking the plunge into co-ownership or renting, you need to be sure that you really understand what you're getting into.

Here are a few things to think about:

Does owning a vacation property fit your lifestyle?

In addition to the fun and leisure aspects of a vacation home it is important to factor in the time and cost involved in year-round upkeep. How will the property be used? If your dream is to own a ready-to-live-in relaxing hideaway while your co-owners dream of a northern DIY project, you may not see eye-to-eye when it comes to how you will be spending your weekends.

It’s important to think carefully about how much time you and your co-owners plan to spend at the vacation property. Will you be vacationing as a group, or do you want to trade off on weekends? Will one use the property more than the other? Will it be a 50/50 split?  

How will disagreements be resolved?  Can your relationship withstand potential friction regarding decisions involving money?

Have you thought about what’s involved before you put it up for rent?

While most Canadians buy a second home for recreational use, growing numbers are also buying for investment purposes. Determine in advance how you will split, and claim, the rental income. In the case of a vacation property that you intend to rent out most of the time, the lender may deduct the rental income from your total monthly debt payments when qualifying you for a mortgage. It is important to be aware that not all lenders will take rental income into account – a mortgage broker can advise you on this.   As well, if you do rent the property for the majority of the year, you may have additional expenses - insurance would be more expensive, and you may wish to consider using a property management company.  How do these fit into your spreadsheet?

Can you afford the financing?

While it certainly helps to go in with a co-purchaser, you want to be sure that your waterfront property isn't putting you underwater.  Seek independent advice on what size of mortgage you can reasonably handle - again, a mortgage broker can help you with this.  And as with any purchase, if you think you will need financing, make sure you get a pre-approval to ensure smooth sailing when you put in your offer to purchase.

Regardless of whether you are buying a cottage that you yourself will enjoy, or as an investment, some pre-planning will help make sure it is a relaxing and rewarding venture.  And don't forget your bug spray!

Image credit: [c] Daniel Steger for openphoto.net

Thinking of helping your kids to buy a home? Three ways to do it

Abigail Van Buren once said, “If you want children to keep their feet on the ground, put some responsibility on their shoulders.”

This holds true even once they’re grown. What better way to give responsibility to your adult children than by helping them to become homeowners?  Further, once your kids are old enough to go to university or first start working, they likely won’t have the funds to buy their own home, yet many of us feel that it is better to own the home we live in, rather than paying off someone else’s mortgage. So, how can this be accomplished? 

Here are three alternatives. Which is most appropriate for you depends on your financial situation and your lifestyle and retirement goals.

Option 1. Provide cash to your child as a gift, for a down payment on a home.

PROS: Your child can buy a home sooner, and start building up equity, rather than paying rent to someone else. If the amount of the gift is more than 20% of the value of the home they wish to buy, you enable them to obtain a conventional mortgage, avoiding mortgage default insurance fees.

CONS: You will have to provide a letter confirming that the funds are a gift, with no repayment required. The child is free to use the money as they choose.

Option 2. Co-sign on your child’s mortgage.

PROS: The mortgage will be obtained based on your financial circumstances. Your child may not have an established credit rating, high enough salary, or a proven track record of employment, to qualify for a mortgage. If your financial situation allows, you can co-sign or guarantee their mortgage. This may result in a better interest rate, larger mortgage amount, and a more ideal home for your child.

CONS: You will be responsible for paying the mortgage, if your child becomes unable to do so. As well, if you later need to borrow money yourself, the debt may impact your own ability to qualify for funds.

Option 3. Use your own cash, or equity you have available in your own home, to buy a home and have your child pay you rent.

PROS: If you feel your child is not yet ready to own their own home, for example, while going to university, becoming the landlord may make the most sense. Using money you have in the bank, or equity in your own paid-off home, you could invest in a rental property. If you do finance the purchase, your interest on the loan is tax-deductible since this is not your primary residence (and if you choose a home equity line of credit, all you have to pay is the interest).   Best of all, your child and their roommates will pay the rent to you, keeping the money in the family.

CONS: If you finance the purchase, the equity in your own home will be tied up and not available to you for your personal needs. The same holds true of you use your own funds. Also, if your child moves away, you might be stuck holding property in an area that was chosen only because your child was attending school there.

The key benefit in these scenarios: the help you have provided will keep money in the family, instead of paying someone else’s mortgage via rent payments.  Talk to your accountant or financial planner to review your options and ensure they are appropriate for your situation, and then enjoy helping to make your child a homeowner!

Photo credit: [c] Microsoft Clip Art