Cashing In

Growing up in Saskatoon, Elton Ash spent summer holidays on the sandy shores of Waskesiu Lake. Ash, now the regional executive vice-president for RE/MAX of Western Canada, says anyone who enjoyed an idyllic country retreat as a child longs to give their own kids the same experience. "There’s still a lot of wealth out there, and people want to provide a legacy, or a lifestyle where they can unplug for a while," he says.
Lower prices are driving a surge of optimism, especially in the West (see "Good Will Hunting," below). This bullishness is spilling over into the recreational market, says RBC’s Kevin Lutz. The Vancouver regional sales manager for mortgage specialists admits that B.C. has seen a slowdown in sales of vacation homes, partly because of fewer buyers from the U.S. and other provinces. But as prices slide and properties sit on the market, there are excellent opportunities. "If you do have some expendable cash right now, you’re in a pretty good position to negotiate," he says. "It’s a buyer’s market at the moment."

Financing: Stretch a Dollar
Decide if your purchase is for pleasure, rental revenue or both, counsels Douglas Gray, Vancouver-based author of The Complete Guide to Buying and Owning Recreational Property in Canada (homebuyer
.ca). RBC’s Lutz says: "Purchasing a vacation property should be a long-term investment and not short-term speculation. You’ll always get a good return if you hold something long-term."
Typically, Canadian banks will finance vacation homes up to 75 percent, but you can often arrange a down payment of as little as five percent, depending on where you’re purchasing. Some lenders can be tougher on securing financing for condo-hotel units and fractional-ownership properties because of the more complex ownership structures.

A mortgage broker with one-stop access to many lenders can help you get the best rate and terms. Carrie Cardinal, a broker with Regina-based Verico Crown Mortgage Services, notes that a high-ratio mortgage (less than 20 percent down) requires insurance. CMHC could charge you as much as 6.75 percent insurance on the total loan, if you put down just five percent and are relying on rental income to make your payments.
One option is to split recreational property financing between a mortgage and a credit line. Buyers can also tap into the equity of their primary home, Cardinal says. "They could take out a line of credit on the house or increase their mortgage, and then pay cash for the vacation home."

Today’s low interest rates, longer amortizations and slower market give buyers much more purchasing power than they had a few years ago. Today, property prices are close to 2006 levels, when five-year interest rates were about five percent and the maximum amortization was 25 years. That means you would have paid $1,745 monthly on a five-year, $300,000 mortgage. Today, for that same $300,000 mortgage, with a 35-year amortization at 4.1 percent, your monthly payments would be around $1,340. "Because you have lower payments, if you qualify for a mortgage payment of $1,745 you can obtain a mortgage of nearly $100,000 more than in 2006. Coupled with lower housing prices, you have improved affordability," says RBC’s Lutz.

Fractional Ownership: Do the Math
If you have a modest budget or don’t want the hassles of maintenance, look for a condo hotel or fractional ownership. Unlike a timeshare, which buys a week or two of use each year, both of these choices give you equity. They also let you offset costs by participating in a rental pool program, in exchange for sharing up to half of the percentage of suite-rental revenues.

Bellstar Hotels & Resorts is a Calgary-based operator of 11 resort developments in Alberta and B.C. Though Bellstar offers whole ownership in its resort properties that include condo hotels, says partner and executive vice-president Jon Zwickel, its one-quarter and one-eighth interests are more popular. A quarter-share entitles you to three months of use annually-and you can put any unused weeks in a rental program for revenue.

If you only need the property five to six weeks a year, look for a resort that offers one-eighth ownership, or share with family and friends to split a bigger fraction. "We have some owners that purchase all four quarters, and then they gift one or two or three of them to other family members," says Zwickel.
Buyers often purchase smaller fractions with lines of credit, and Zwickel says quality developers help arrange financing on larger shares. Read the resort’s disclosure documents first and factor in strata fees and other carrying costs. If the project is complete, stay a night or two as a hotel guest-and remember that a unit in a well-kept development holds its value better.

When shopping for a rental-pool property, scrutinize the development’s vacancy rates and revenue stream. RE/MAX’s Ash observes that between 2001 and 2007, it was relatively easy to get a good return on ski resort condo hotels. That may no longer be the case, so understand the risks. "You always have to budget for vacancy," Ash says.

Taxes: Pay it Forward
Brian Anderson, a tax partner at Deloitte & Touche’s Winnipeg office, says understanding the principal-residence exemption is crucial. Your principal residence, which could be your first or your second home, is not subject to capital-gains tax on the profits of sale. Since you don’t have to declare which property is your principal residence until the year the first of your properties is sold, Anderson says, "You have the benefit of saying, ‘My cottage went up 100 grand and my house in the city went up 300 grand: I want my principal residence to be the home in the city.’"

Even if you plan to use your vacation home for business (as a rental property, or for entertaining clients), Anderson usually tells business owners planning personal use of a second home not to buy it through their company-they risk a big tax bill for personally benefiting from corporate funds. Still, there can be financial advantages to having the property in a company, provided you document your business activities and pay for your personal use. "The corporate tax rates are dropping, so that’s one thing you might entertain," Anderson says.

It’s legit to write off maintenance, insurance and other operating costs on an income-generating property. But if you buy a second home only to flip it, any profit when you sell is fully taxable as regular income, not half-taxable as capital gain.

Passing a legacy property on has its own tax challenges. Unlike the U.S., Canada has no estate tax, but your estate is subject to probate fees when you die. In the West, these fees range from Alberta’s $400 maximum to 1.4 percent of the value of a B.C. estate over $50,000.

Legal: Law of the Land
Though Westerners are mobile, real-estate laws aren’t. Melanie McDonald, an associate with Borden Ladner Gervais LLP in Calgary, says a Saskatchewan resident with a B.C. spread would pay B.C. probate fees on the value of the B.C. property. You’ll need a power of attorney that’s valid in the province where your vacation home is located. McDonald advises notifying your will lawyer before you buy to determine the best structure for your estate; some owners take out a life insurance policy to cover future tax liabilities.

Many recreational property owners establish trusts or make co-ownership arrangements for future generations. Trusts come in many forms, but a common drawback is that they trigger capital gains every 21 years, making them perhaps a less-than-ideal option for passing property on to future generations. Co-ownership with several children is one solution. However, this setup has its own pitfalls. McDonald says it could affect the children’s principal-residence exemptions. Also, you and your offspring may fall out, and their financial woes could put the property in creditors’ hands. "You have to realize that you’re giving away your asset," McDonald says.

Insurance: Keep it Covered
Guaranteed-replacement-cost and all-
perils coverage are musts, says Ted Byrt, an independent agent with State Farm Insurance in Edmonton. The former covers the cost of rebuilding, even if it exceeds your insurance limit, while the latter includes most every contingency outside the exceptions in your policy. Byrt also suggests $2 million in personal-liability insurance, and possible business and rental coverage, depending on how you use your property.
Insurance discounts might apply if you are over 50 or have other policies with the same company. You can also save on premiums by carrying a high deductible or a deductible fixed at 1 percent of the property’s value.

Know the limits of your insurance policy. Byrt says there is no coverage for flooding from outside your home, or for windblown ice that sometimes piles up on lakefront properties. Unless you request it, earthquake coverage is not usually included. Insurance for log homes is scarce, and some companies won’t cover properties in wooded valleys. The further you are from a fire department, the higher your premium. No nearby hydrant? After firefighters exhaust the water resources on their truck, you might want to break out the marshmallows and hotdogs.

Bargains: Happy Hunting
As summer approaches, watch for bargains like the market saw this past winter. At Big White Ski Resort near Kelowna, B.C., a 1,275-square-foot slope-side cabin fetched $612,000 in January 2007. But last November, Ken Mitchell of RE/MAX Kelowna sold the same property out of foreclosure, minus its furnishings and appliances, for just $410,000.
In other words, happy negotiating. wl