Or is it a money-pit?
Many people believe their cottage or Floridian condo is an investment, so let’s start the conversation…
Raise your hand if you’d lke to own a cottage one day?
I think we’d all like to own a cottage one day, but it depends on the circumstances.
If you were offered a cottage for free, you’d take it. But if you have to work an extra twenty-five hours per week, every week, for the next ten years, maybe some of you would opt out.
For some reason, I’ve always thought I wanted a cottage, but in the last year or so, I’ve realized that it just might not make sense.
Logistically, when am I going to stop working 7-days per week? When will I have the time and wherewithal to make use of a cottage? How much do people really use their cottages?
Financially, when will I be able to afford a cottage? Would I have to scale back the size of my primary residence in Toronto? How much debt would I take on with the two properties combined?
And finally, what is a cottage from a true “investment” standpoint?
Ask some people, and they’ll tell you a cottage is a downright money pit.
Ask others, and they’ll tell you that the right piece of land, in the right area, will continue to appreciate every year, forever.
I have a friend whose family cottage is up at Pointe Au Baril, surrounded by crown land that will never be built on, and thus the land that is built on is in exceptionally high demand. This is the kind of cottage that will always appreciate, simply from a supply and demand standpoint. These properties are kept in the family and handed down each generation, and rarely ever put on the open market.
But that doens’t mean these properties, or any cottages for that matter, come maintenance free.
I’m not just talking about the property taxes and heat/hydro/water. I’m talking about costs associated with running that property; landscaping a few acres, taking the dock out of the water in the winter, servicing the boats and jet-skis (not to mention the cost), septic tanks service, firewood, garbage – and I don’t even have a cottage! I’m just thinking about all the things that cottage-owners pay for, from what I’ve seen.
So think about what it costs to run your average cottage.
And don’t think for a moment that 80% of cottage-owners don’t also run out and buy a speed boat, jet-ski, canoe, and other toys. And how many of them consider their “home away from home” a castle, and put in a pool table, wireless Internet, TV with 300 channels, etc.
There’s no way a $700,000 cottage costs $700,000.
A cottage-buyer might spend $50,000 on toys, an equal amount on furnishings, and then how much on maintenance?
It sounds less and less like an “investment” to me.
Another family friend of mine owns a condominium in Florida, which was purchased in the 1980’s for about $100,000. The condo reached a value of about $650,00, U.S. funds in the late 1990’s, which with the dollar at $0.65 US, meant the condo was worth $1,000,000 Canadian. The condo lost half its value – from $650,000 down to $325,000 today, but now that the Canadian dollar is at par, it’s only worth $325,000 US, meaning the loss from the peak is almost $700,000, or 70%.
I’m told that between the taxes, utilities, maintenance, property managing, upgrades, and renovations, close to $200,000 has gone into this condo over the years. Do the math, and it means that this property isn’t worth much more than all the money that has gone into it.
Perusing MLS, I found a cottage in Port Severn that’s only 90 minutes north of the city, with 4-beds, 3-baths, built in 1999, and in great shape. See it HERE.
Or if you want more rustic, and you don’t want wireless Internet, HERE is a cottage on its own island, for only $549,000.
But let me use the first one as an example, priced at $779,000.
Let’s say that you’re 40 years old, doing pretty well for yourself, and you’ve got enough for a 35% downpayment. That’s well more than the 20% minimum required by CMHC for a secondary property, and well above the average that buyers put down on properties.
So you write a cheque for $272,650, and you’re now the proud owner of a cottage.
The monthly mortgage cost is $2,342.05, and you’re paying $28,104 per year in total mortgage payments.
Your property taxes are about $4,000, your utilities, to run this place year-round, are about $10,000, and “George,” who comes by to check on the property while you’re away, to service your boat, to mow the lawn, to pick daisies, and do handle a hundred other mundane tasks, collects about $6,000 per year from you as well.
You’re smart, so you don’t buy your toys outright – you lease them. So you’re paying $5,000 for your boats and other water toys.
All in, you’re looking at over $53,000 per year for this property, and my question is this: how many days per year are you there?
I’ve talked to a lot of people who own cottages in Muskoka, condos in Florida, ski chalets in Colorado, or quaint cabins in Newfoundland, and most of them will make the same admission: it costs a lot more than it’s worth, but it’s awesome.
So that’s it?
Those are the exact words spoken by a colleague of mine who has a vacation property that he visits maybe three weeks per year.
So back to the cottage example, where you’re paying $53,000 per year for the property, what would you say to renting a cottage fit for a king, for two full weeks, at $7,000 per week, all-in? Live like a God for 14-days, and then leave, and never look back!
My family friend told me, “I could stay at the Four Seasons, in a suite normally occupied by some middle-Eastern prince, order room service all day while getting massages, and still pay less than I do each year to run my vacation home.”
But where’s the fun in THAT?
I guess the real question is: What is the cost of ‘pride of ownership?’
I’m sure you sense the irony here, since I’m supposed to be a salesman, and “pride of ownership” is something I talk about with my own buyer-clients. But maybe I feel that a secondary property is different.
How much use do you need to get out of a vacation property for it to be worthwhile?
What percentage of your net worth are you willing to “throw away” just so you can own a property?
Look, consumers spend their money on a multitude of different things. A banker might lease a Ferrari for $7,000 per month, and blow $84,000 per year on the car, when he could have bought an Audi or Lexus for $60,000. I understand that we’re making choices on how to spend our money, and that every time we spend $120 on a nice dinner on a Saturday night instead of eating dollar-store oatmeal, we’re splurging, and spending money on something we don’t necessarily “need.”
But of the two burning questions I just asked above, I keep coming back to the first one: “How much use do you need to get out of a vacation property for it to be worthwhile?”
Personally, if I weren’t going up to a cottage three weekends per month, from May to September, I’d have a hard time justifying the cost.
In the example above, with the $779,000 cottage, that took $272,650 to purchase (with 35% down), which could take the average person two decades to save, if at all possible. So what kind of position must you be in with respect to your primary residence, in order to spend $272K on a cottage? Must you own your $900,000 house in CASH in order to go buy this cottage? Or are people willing to spread themselves thinner?
If you had a $500,000 mortgage on your $1,000,000 house, and you had $272,650 in the bank, would you:
a) pay down a little more than half what’s owing on your mortgage
b) go out and buy a $779,000 cottage with 35% down
Play around with the numbers until it makes sense to you. Move them up or down until you would answer both a), and then b).
Would you insist on owning $1,000,000 of that $1,000,000 house before putting money down on a vacation property?
Or would you run out and buy a cottage with the minimum 20% down, and stare a $3,000 monthly mortgage in the face?
Every property-owner has a different mentality, and your attitudes can change over time.
In the past 3-4 years, my outlook has become extremely conservative.
I ran into a guy at a wedding that I went to high school with, who is now a financial advisor, and he told me, “My clients made an average of 33% on their portfolios last year.” Well, that alone was enough to tell me I didn’t want to go near this guy. Hey, 33% is a great return for one year, but it’s not sustainable, and it tells me that there’s an equally good chance that his clients lose 33% next year.
I’ll take 6-8%, every year, for the rest of my life. In a heartbeat. Ask the folks at OTPP and CPP what they think. But now I’m really getting off topic…
I’m just one person, with one opinion, but I probably wouldn’t buy a vacation property until I owned 100% of my primary residence. Had you asked me this question three years ago, my answer might have been different.
And even if I did own 100% of my primary residence, what if I wanted to upgrade? Something twice the cost? Then I’d only own 50% of my primary residence, and any money I come into, that could have paid down a mortgage on a vacation property, should probably then go toward paying the mortgage on my primary residence.
If we were all independently wealthy, this conversation would be moot. Everybody reading this blog, right now, can think of “that guy,” or “what’s her name,” whose parents are loaded, and who never has to work a day in his/her life, and can run out and buy a million-dollar cottage today.
But for the rest of us, the idea of a vacation property is nice to think about, but just might end up being an anti-investment.
What’s the value of a vacation home in Scottsdale, Arizona today, compared to eight years ago?