Investing for the future
THE FINE ART OF PROPERLY MANAGING YOUR HOME AWAY FROM HOME
Many homeowners reach a stage in life where a second property seems like a great investment. Whether you’re looking for a vacation home for family use or a rental property to generate income, it’s important to talk to an advisor.
Depending on your intentions, your financing strategy can vary considerably, says Todd Lawrence, senior vice- president, products and payments for CIBC in Toronto.
“A vacation property is very different from an income property when it comes to planning. There can be a number of financing and tax implications that can play a role in your mortgage decisions.”
The tax implications can be significant in some cases, especially when it comes to capital gains on second properties. Or there may be regulatory or municipal restrictions on certain properties in terms of generating income.
“That’s why it’s best to talk to a good accountant and lawyer who understand the nuances around second properties, to make sure you’re doing everything right.”
What you can afford in a vacation property may depend on how much equity you have in your existing home, Lawrence adds. If it’s an income property they’re considering, the income generated will be a key factor in determining the amount of mortgage they are able to carry.
Scott McGillivray, Canadian television host and long- time real estate investor, has spent a good part of his career acquiring properties. He says his experience has taught him many valuable lessons along the way.
“A lot of people aren’t always aware of some of the more creative ways to manage additional property purchases. For example, typically you need a minimum of 20% down, which means avoiding paying an insurance premium, which is a good thing. But what many people don’t realize is that they may use equity from their primary residence to make up that 20%, whether they’re financing a rental property or vacation home.”
He’s also partial to the idea of a cash back mortgage for a vacation home simply because it provides resources to invest in furnishings and appliances. “These are things you take for granted when you live in your [ primary] home.”
In any mortgage scenario, flexible terms are critical, he says.
“Sometimes you might think you want to get the lowest rate and lock yourself into a five- year fixed- rate mortgage. But then you may not be able to access the equity in your home if you need to make renovations, or you could end up paying a prepayment charge if you want to prepay or change payment schedules.”
Even before the financial conversations begin, it’s essential to get a clear picture of both your short- and long- term intentions, McGillivray says.
“You have to be savvy and understand what you’re doing. Is it only a vacation home or are you renting it for part of the year? Will you keep it more than five years and pass it on to your children or do you plan to sell it to generate profit? These are things you need to let the experts know about so they can offer you the best options.”
If you have converted a second property to a multi- unit income generator, it’s also important to decide whether the conversion is temporary or permanent. Then it’s a matter of balancing the pros and cons.
“It might not make sense to put in three kitchens if you plan to revert it back to a residential property at some point,” McGillivray says. “However, if your income from tenants pays for the mortgage many times over, you will likely have enough money to convert it back when you need to. My best advice for any scenario is to work with a mortgage advisor and do the math.”