A vacation home is almost a badge of honour among Canadians. It’s a chance for you and your family, and a few lucky friends, to retreat from the hustle and bustle of city life to relax in your own private paradise. Just the fact you can afford a property, let alone the time off to enjoy the place, is a testament to the fact you’ve made it. But for many, the dream of owning a vacation property never takes flight—often because of the initial cost and ongoing expenses. However, there are ways to own a waterfront cottage, ski chalet or Sunbelt condo without spending a fortune.
MoneySense crunched the numbers and interviewed successful real estate investors to find the best deals in vacation homes. We show you the good investments—cottages and condos—and steer you away from the terrible ones—condo-hotels. If your budget is limited, we tell you how to get real value out of timeshares and fractional ownership. So take your time and find a place that suits your needs and budget, and you and your family will be basking in the sun in your cherished retreat for years to come.
Timeshares: A lifetime of vacations at a bargain price
Danny Floh Bak and his wife are not easily swayed by sales pitches. But after a 90-minute tour of a stunning five-star St. Maarten resort, the Toronto-based couple found themselves sitting in a room face to face with “a hard-nosed woman.” Danny recalls that without as much as a nod, “she launched into the hard sell.” Peppering the couple with personal questions, the sales woman insisted they’d save money if they simply invested in a timeshare. “She was trying to show us that if we invested $50,000 now, we would save on vacations for the next 30 years,” says Danny. In the end, the couple, who were enticed on the tour with an offer of free gifts, walked away without investing a dime. “We were never convinced the numbers were accurate.”
Often it’s the promise of a free dinner or massage followed by a gruelling, high-pressure sales pitch that give timeshares their horrible reputation. But there are ways to take advantage of what timeshares can offer, without losing your shirt (or dignity). “For family holidays, nothing matches the value of a timeshare,” says D.G. Southen, an experienced real estate investor from London, Ont. For over a decade, Southen has been buying, using and selling his timeshare deeds—and he’s never paid full price. His trick: buy resale not retail.
According to industry statistics, 50% to 70% of a timeshare’s retail price—the price you pay at the resort after listening to a timeshare sales presentation—goes to marketing. So if you bought a timeshare for $20,000 during one of these presentations, as soon as the ink dried on the contract that timeshare would be worth $6,000 to $10,000, at most.
Southen’s most recent purchase was a two-bedroom, 1,600-sq-ft condo in Grand Cayman’s Reef Resort. He paid under $1,000. The retail price for the same unit starts at $30,000. “You can always find someone who’s desperate to off-load their weeks,” he says.
Good places to find resale timeshares include Ebay and Tug2.net. But before buying, watch a few online auctions first. “You won’t miss a deal,” says Southen, “because there’s always another.” Once you’ve narrowed down your search and learned how the auctions work, you’ll need to dig deeper to avoid costly pitfalls.
First: Never buy an off-season week. “You can’t trade an off-season week, let alone sell it,” says Southen. He learned his lesson after buying an off-season week at Carriage Ridge Resort, a small ski resort north of Toronto. “I ended up giving it away.” Instead, buy into a destination you want at a time you will use. That way you’ll always enjoy it, even if others are not interested.
The key to good timeshare investments is to understand it’s about keeping vacation costs to a minimum, not resale value or appreciation, which often doesn’t occur. Keep an eye on costs. You’ll pay between $300 and $500 in closing costs (and wait up to three months for the transfer to take effect) when purchasing a timeshare deed from another owner. Resorts also charge separate transfer fees (usually $50 to $300, depending on destination). Annual maintenance fees run $300 to $2,000 each year—like condo fees, these help maintain the resort. Factor in property taxes and cleaning fees, although many resorts include this in annual maintenance fees. Also pay attention to timeshare management. While not governed by condo regulations, timeshares operate in the same way and can be hit with special assessments—added costs for major upkeep. The best way to avoid pricey extras is to ask the resort property manager if they’re contemplating a special assessment. Skip this and you may end up like one Saskatoon retiree whose annual maintenance on his B.C. ski resort timeshare doubled in a year from $500 to $1,000, before being hit with an extra $2,000 special assessment.
U.S. condos bask in the sun in your own southern retreat
Despite plummeting house prices, crops of foreclosure signs and headlines of job losses, the U.S. Sunbelt—which includes Florida, Arizona, Texas and California—was deluged with Canadian real estate shoppers after the U.S. real estate market crashed in 2008. Property prices dropped 60% on average, and Canadians went on a vacation home shopping spree. According to the U.S.-based National Association of Realtors (NAR), Canadians accounted for almost a quarter of all foreign buyers snapping up U.S. properties by late 2011—and 80% of Florida properties were bought by Canadians in 2010.
Cheap prices is the reason Andrew Vitch, owner of Sunny Point Resort in Muskoka, Ont., snapped up his Florida winter hideaway in late 2008. “The subprime mess burst and prices were declining,” recalls Vitch, who is convinced he bought his vacation villa at the perfect time.
But what about now? With U.S. real estate making a comeback, is it still a good time to shop for a south-of-the-border vacation condo? According to NAR, Canadian snowbirds and investors are still finding good deals. Residential home prices in the U.S. are slowly climbing back to pre-crash levels, but prices on vacation homes are still 40% to 50% lower than half a decade ago. “It’s not just retirees who are interested in a U.S. vacation home,” explains NAR’s Harry DeLeeuw. These days families in their 30s and 40s are also making the leap.
When it comes to cost-effective vacation property options, condos top the list. They suit people who plan to vacation in the same spot year after year, but want to cut their lodging and food expenses, without being saddled with the responsibility of renovating and maintaining a property.
Before rushing out to cut a cheque, ask yourself about your motivation. “Purchasing an investment property is different than purchasing a vacation property,” explains Southen. An investment requires an objective analysis of a property, market and costs. A vacation home is purchased as a way to enjoy your disposable income. This doesn’t mean ignoring the financial fundamentals, but your search should start with your own family’s needs.
One-time costs include $300 to $1,000 for a standard home inspection. In hotter climates, such as Florida and Arizona, you’d be well-advised to pay another $1,000 for a separate termite inspection. If you’re getting a mortgage, budget 1% to 2.5% of your mortgage amount—not your purchase price—for title search and insurance.
Ongoing expenses can add up. Condo fees are relatively cheap—typically under $300 for a two-bedroom. Property insurance will cost $350 to $800 per year. Property tax differs from state to state: it can be as low as 0.5% (in Arizona and California) and as high as 2% (in Florida). Also find out if the state charges extra non-resident taxes. For example, Florida charges foreign property owners twice as much tax as it does state residents—and these rates can rise, sometimes quickly, with no cap.
If, after crunching the numbers, you’re still convinced a vacation condo is the most cost-effective option for you and your family, it’s time to turn your attention to finding the right property. The best way to do this is to enlist the help of a realtor. Before purchasing his two-bedroom, two-bathroom condo in Phoenix, Ariz., Toronto resident Jim Chuong searched online for U.S. realtors who had experience working with Canadian buyers. Chuong would then cross-reference the listings from the realtor with local crime stats, which he found on free and pay sites. Chuong’s realtor helped him find properties with the greatest chance of future appreciation. For instance, the realtor warned against buying a stacked condo—two, three and four-storey buildings—which appreciate at a much slower pace than do side-by-side or townhouse-style condos.
Once you have a few interesting listings, you’ll need to examine the properties based on your end goal. If it’s just you and your family using the condo as a vacation spot, pick the location and amenities that suit you best. If you plan on renting the place out while you’re not using it, you’ll need to consider what other vacationers want. For example, your potential rental income can drop by half if you’re even a block away from a beach. Keep this in mind if you plan on renting out the condo.
Some investors thought they’d found the best of both worlds when they purchased a condo in a hotel. Known as condo-hotels, these units are housed in luxury hotels and give owners access to hotel amenities. When not in use, the hotel rents out your unit and you get a percentage of the profits. But since their brilliant debut, condo-hotels have lost their sparkle. Late last year real estate consultant Ozzie Jurock candidly declared that “every condo-hotel investment in B.C. has lost money for the investor.” Elsewhere, investors aren’t faring any better and, despite what developers and realtors may say, appreciation on these properties looks dismal at best.
Condos may be a better bet, but if you decide to buy, stick with well-travelled areas. These include Tampa, St. Petersburg, Miami, Fort Lauderdale and Orlando, all in Florida. For snow destinations try Stowe and other ski areas in Vermont. These may appeal to people from Toronto, Ottawa, Montreal and the East Coast, where flights are plentiful and relatively cheap. Vacationers from Winnipeg, Calgary and Vancouver often buy in the Phoenix/Scottsdale area of Arizona—condos prices there dropped 50% after 2008 and the state has low property taxes and homeowners’ association fees. B.C. residents are snapping up places in Seattle and Puget Sound. While a vacation home is best seen as consumption spending rather than an investment, choosing an area with broad appeal and buying at a discount increases the chances your property will rise in value in years to come.
Cottages swim, barbeque & enjoy the slow life in your family’s private vacation home
If you’ve ever dreamt of owning a cottage, now’s a great time to buy. Over the last decade prices for lakefront real estate and chalets in key Canadian vacation hot spots rivalled the housing prices of the finer neighbourhoods in Toronto, Calgary, Vancouver and Montreal. But over the last few years this started to change, and vacation property prices continue to soften. “It’s no longer a seller’s market,” says Tim Harris, owner of Tradewinds Realty, which services the South Shore area of Nova Scotia.
In the last two years, Harris has seen a 20% drop—a “price correction”—on vacation properties priced at $1 million or more. Better still for would-be buyers, the under $1 million vacation home market is in worse shape. “We don’t have enough buyers for these properties,” says Harris, whose brokerage sells only half of the 1,000 or so cottages it lists in a given year.
One reason for the decline in sales is that U.S. buyers—about 50% of Canada’s second home purchasers before the crash of 2008—have dropped out of the market. Not only did Americans stop buying, they also began selling. “Americans started rationalizing their vacation home purchases and started selling in droves.” So in the last four years 95% of sales have been to Canadian buyers.
John Sallinen, a Re/Max broker in the Parry Sound/Muskoka, Ont., area agrees. “Average cottage prices have dropped almost 50% in this area to between $350,000 and $400,000.” Business is still brisk, says Sallinen, but the frothy buying of half a decade ago is gone. “There are no bidding wars anymore.”
If looking to buy, the first step is to determine the primary use for the cottage. For some it’s simply a place for family to gather and enjoy vacations. For others, it’s a retirement home or a way to earn money through rentals. The answer to this question will determine what you’re looking for and where. So if you plan on renting out the property while you’re not using it, you may need to spend more initially to make sure you get a lakefront spot with beach access. If the cottage will eventually be your retirement home, consider its proximity to amenities like hospitals and grocery stores. If just for family use, consider the size of the kitchen and family room, where most gatherings take place.
Next, get your finances in order. You need to budget for annual maintenance, property tax, propane fuel refills, septic tank cleaning and garbage dump fees. You’ll also need to come up with a hefty down payment—second properties require buyers to put down at least 20%.
Locations close to major urban centres carry higher price tags because of proximity, but other factors also drive up a property’s price. “The size of a lake will dictate a larger price,” says Sallinen. “Most people want to be on a large lake.” Get off the big lakes and travel a bit further and prices begin to drop, sometimes dramatically. For example, driving 2.5 hours from Toronto to a four-bedroom winterized cottage on three acres of land abutting Georgian Bay will cost you almost $2 million. But if you’re willing to drive an extra half hour to get to your cottage, you could purchase a three-acre, four-bedroom, year-round property on Manitouwabing Lake for just over $650,000.
To narrow down your choice of locations, consider tapping into market research. Every year in May, Re/Max releases its Recreational Property Report, which offers insight into costs and availability in the nation’s prime vacation spots. Cottages in places like Ontario’s Prince Edward County, Manitoba’s Lake Winnipeg, and Canmore, Alta., can be purchased for under $300,000.
If that’s still too steep, consider fractional ownership. Known as cottage-lite, fractionals started to appear in the early 1990s at American ski resorts for people who wanted vacation properties but didn’t want the expense or hassle of owning real property. It’s why Don Cruikshank paid $71,000 for a partial ownership of a three-bedroom cottage in a 43-acre complex, with over 4,000 feet of shoreline in the Muskoka region in 2007. “I don’t have to worry about shovelling the walk or maintaining the dock,” says Cruikshank, a semi-retired engineer who lives in Thornhill, Ont. “Every year we simply drive up and find the place in good condition and ready to enjoy.”
Cruikshank purchased one interval—the equivalent of five weeks—in the cottage. He has access to the property for one week in every season, plus an additional rotating week. He also pays roughly $2,500 per year for a property manager, insurance, property tax, utilities, repairs and cleaning. Every year in June co-owners choose their weeks for the upcoming year. “Even though we haven’t always had first picks, we’ve always received the weeks we desired,” says Cruikshank. As part of his ownership, his family has access to tennis and basketball courts, canoes, paddle boats and trails. A similar property in the area would have cost at least $500,000, not including yearly costs. “I bought worry-free cottage living,” he says.
There are some drawbacks, however. Financing fractionals can be difficult, you can’t customize the interior design, and the resale is significantly less than with cottage properties. However, it’s been a great fit for Cruikshank. In fact, only a couple of years into his fractional ownership, he bought another five-week interval at the same cottage. “I like the fact it’s all there, ready to use immediately, in one of the best cottage areas in Canada.”