Every year thousands of Canadians become home buyers for the first time, and as long as you have an experienced real estate agent to guide you through the transaction, buying a home is a fairly straight forward process. If you ever encounter a situation where you are unsure, a quick Google search will reveal pages of upon pages of information to inform your decision.
But there is another type of property transaction that is not quite so straightforward, and that’s buying a cottage. Once considered a quiet market that essentially shut down when colder weather arrived, the cottage industry in Ontario is experiencing a surge in activity, thought to be a spillover from the hot Toronto real estate market. In just the last year, the median price of waterfront property near Toronto has risen 30.4 per cent. In fact, a recent Royal LePage report finds the average Muskoka cottage price now rivals that of a detached house in Toronto, at $1.5 million.
This surge in pricing has taken the average family cottage from a quiet getaway to an investment property with significant financial implications, which is why it’s important to ensure you go into your cottage property purchase with your eyes open. Here are several considerations to take into account when buying a cottage in lake country.
Related Read: 5 Things to Consider When Buying a Cottage
It’s a Very Localized Market
Unlike Toronto condos and houses, as the market for cottages continues to heat up, many listings don’t even make it to the Multiple Listing Service (MLS) website. Because these markets are so small, real estate agents can communicate effectively with one another and find a buyer before ever having to list the property. This unique characteristic of this market means it pays to choose a real estate agent with experience (or even one that specializes) in your target area. If you are a young home buyer with a limited budget, your options are even more scarce, and this advice is even more important.
Additional Mortgage Considerations
If you are planning to get a mortgage to finance your cottage purchase, it’s important to find a property that will meet your lender’s requirements. In most cases, cottages are separated into two categories: Vacation A and Vacation B properties. Vacation A properties have a permanent foundation, a potable water source, year-round heating and road access. Vacation A properties are desirable by lenders and conform to standard lending rules, similar to your principal residence.
Vacation B properties, on the other hand, don’t meet the minimum standards mentioned above and are more difficult to finance. These properties might not have a permanent foundation, may only have a wood stove or might require the owner to bring their water when visiting. These properties may require a down payment of up to 35 per cent of the purchase price, which is why it is crucially important that you determine whether your potential cottage is a Vacation A or Vacation B property.
Improvements and Tax Considerations
If you are planning to purchase a cottage that requires a lot of improvements, make sure you keep track of the money you spend improving the property. At some point, you are going to get rid of the property, either by passing it on to your kids or by selling it. When this happens, you’ll have to pay tax on the capital gains of this property because it is not your principal residence. You can subtract any improvements you make to the property from your capital gains – so keep these contracts and receipts!
Prepare for Ongoing Costs
Cottages are expensive, and you need to be prepared to absorb those extra costs. Property taxes, maintenance, fees to store and dock your boat, winter plowing fees – the list goes on! There are also unexpected costs including repairs and property improvements. The bar has been raised in recent years for the standard of living expected in cottages, and many cottage goers are changing their perception of what they would like their cottage experience to be. Instead of a rustic experience, many cottage buyers want the whole package including granite countertops and multiple bedrooms. These improvements cost money, either in the upfront cost, as an ongoing cost, or as improvements you’ll need to make before selling.