A cottage is a significant commitment of time and money. But is it a good investment property? Chartered Professional Accountant Enzo Morini, a partner with Williams & Partners LLP in Markham, answers some frequently asked questions about cottages as investment properties.
Is a cottage a good investment property? – “It depends on your objectives for the cottage,” says Morini. “Do you want to use it for your own personal enjoyment? Is it something you want to pass down to future generations? Or is it simply a real estate investment? These objectives aren’t mutually exclusive, but they may have an impact on whether your cottage is a good investment property.”
When should you buy a cottage as an investment property? – “A cottage is a very expensive asset,” says Morini. “The market tends to be cyclical, in that people tend to feel better about spending on leisure items like cottages when the economy is doing well. Prices tend to spike in the spring and tail off in the fall.” Morini also believes that interest in cottages will increase over the next decade, as more people reach their 50s. Conversely, others suggest that older boomers will look to divest themselves of cottage properties resulting in an increased supply.
Where should you buy? – “When it comes to a return on your cottage investment, the old saying ‘location, location, location’ is absolutely true,” says Morini. “The cottage market in selected areas of southern Ontario has been hot. If you buy now you may not generate a large return on your investment but the potential for appreciation is always there.”
Is renting the cottage a good way to increase the return on your investment? “Renting won’t likely cover all your costs, because of the seasonal nature of cottage rentals,” says Morini. “You are really just looking at the summer months, and perhaps a few weeks at Christmas and during March break.” Renting may make sense if you don’t mind strangers living in your cottage and if you are prepared to rent it out during peak rental periods. The amount you can charge will depend on the market, the length of the rental, and such things as the cottage’s size, location and amenities.
Can you deduct rental costs from your taxes? – “You can deduct mortgage interest, property taxes, utility costs, and some maintenance costs,” explains Morini. “Deductible maintenance costs include ongoing maintenance, not enhancements to the cottage.” Also keep in mind that you can only deduct mortgage interest for the months the cottage is available for rent. Expenses will be limited to income unless the cottage is used exclusively as a rental.
What else can you do to protect your cottage as an investment property? – “It is absolutely critical to keep up with the maintenance on your cottage,” advises Morini. “Cottages get more wear and tear and you need to stay on top of potential problems such as water damage, roof damage and frozen pipes. If you don’t, you may be looking at significant costs.” Proper insurance is a must and a property manager or someone to look after your cottage when you are not around is very important.
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