Let’s Talk Vacation Properties
As summer is abruptly coming to an end, it may seem odd to be thinking about vacation properties. The luxury of a waterfront home on some exotic island or on the shore of a European coastal town seems like a wishful dream as we stare down winter armed with a pumpkin spice latte.
But – as with everything, we want to look at the idea of vacation properties from purely an investment and financing perspective.
There has been a lot of talk in mortgage circles about vacation properties. As covid travel restrictions subsided, international airports were packed this summer with weary Canadians looking to escape to as far and as fast away as possible. It seemed like everyone and their dog went away this summer. And as we all slowly trickled back, we brought with us new ideas and new possibilities – what if we could buy that condo in Florida, would it let us hang on to our vacation indefinitely? What if we bought that small stone house and got to own a little piece of Tuscany forever?
A viable investment
Beyond aspirational escapism – is there another key driver in the popularity of vacation homes abroad? Yes. Vacation properties abroad have become an increasingly viable investment option for small real estate investors. Many of us who look to real estate as a personal investment see that Canadian condos are no longer an option as the rent generated no longer covers the carrying costs. Prior to the pandemic, small town properties and cottages that could be Airbnb-ed were an option – but these too have been priced out.
Scroll through the account “bargainhomesabroad” on Instagram and you see that for $41,000 (US) you can own a 300 square foot “cozy romantic home with stunning views in the Italian mountain village of Montatto Carpasio, not far from Monaco and France”. Although this is an extreme example, the truth is that for GTA homeowners, prices abroad almost always seam like a steal. And this comparison to our own crazy market makes a vacation property both emotionally and rationally appealing.
Before you Begin – First Decide
Before you delve into serious consideration, our suggestion is to first decide if your vacation property abroad will be for personal use or if it will be an investment financed by rental revenue. This is so important as it will drive every decision tied to a vacation property.
And of course the most important decision will be – can I afford a vacation property?
Can I afford a vacation property?
If you’ve found a spot in this world where you love to travel, have ties or an affinity too – it can actually make sense to purchase a property there. Even if its sole purpose is for your own use and enjoyment. When you look at the price of a vacation property – think of the price amortized over the number of times you will use it. Will your children, grandchildren use it? And even if the property is solely purchased for your own personal enjoyment – it is still an appreciating asset – and as such an investment. Remember to also consider though, that like all real estate, this vacation property will have yearly expenses associated with it.
If purchasing an investment property as a source of rental income – there are many variables to consider when it comes to affordability. How much can you generate in rent? Can the property be a long-term rental, or will a short term will earn you more? To understand the total cost and revenue of a property abroad – you really, really need to be familiar with the town and the country you are investing in. Including any property taxes, energy costs, etc. Alternatively, you can invest in a managed property – but these often come with higher property and rental management fees.
Diversifying Your Portfolios
Another financial perspective for the case of foreign vacation properties – portfolio diversification. Just like your other investments, your real estate portfolio should be diversified. Investing in different markets protects your portfolio from geo-specific market fluctuations. We live in a global world and assets held in different currencies are also a form of diversification protection.
Where to Begin?
Like with any property investment – location matters. When looking for a secondary home or investment property – it’s important to familiarize yourself with the location. Internet searches are great – but nothing replaces “ground visits”. Visit and get to know the country to intend to invest in. Take time to familiarise yourself with the local market – it may be a nice place to vacation – but is it easy to do business? Are there administrative barriers? Do you speak the language? Connecting with locals is key – meet with realtors, property managers. Connect with others who have invested in the region. If you haven’t already, spend the time in the specific town or neighborhood as, so often, one street can make a difference in property value.
Other important considerations
Foreign property searches are different from local property searches in that when we look locally, we take it for granted that we’re already familiar with so many of the market rules and regulations. Foreign property searches require extra due diligence. For example, what are the tax implications of property ownership? Are there any international/economic sanctions in place that could prevent the purchase (perhaps not the country, but is the property owner sanctioned)? Are there local energy restrictions in place? What tenant/landlord protection acts are in place?
Additional Benefits
Some vacation property investments can offer a path to residency permits or even citizenship. Countries like Spain, Malta and Greece all offer differing paths to a “Golden Visa” through real estate investment.
Financing your Vacation Property Abroad
Finally, as with every real estate investment, optimal financing of your property is key, and the solution is often very specific to many variables in each deal. You may be able to get a mortgage locally, depending on the country, but most often clients will do an equity take out on an existing property in Canada to purchase real estate abroad.