As savvy realtors and buying or selling consumers can confirm, the conventional real estate market is a tricky transactional art and science to maneuver.
The recreational property real estate market, particularly the recreational property market within a reasonable commute from Calgary, is even trickier.
Of course, most Calgary cabin or cottage dreams are about trees and lakes and family weekends, campfires, long walks in the woods and getaway good times in popular, not-too-crazy a commute from Calgary places like Canmore, Sylvan Lake, the Shushwap, Gleniffer Lake, Pine Lake and Invermere.
For the past decade or so, especially with the COVID disruptions and technology turbocharging options to work from remote, the appeal of switching out Calgary traffic snarls, noise, sprawling concrete, construction bottlenecks and detours, pricey parking and the rut of redundant office meetings for the tempting work/life balance and lifestyle of a recreational property is more irresistible than ever.
According to savvy Calgary realtor Doug Koop, broker/owner of RE/MAX Realty Professionals, with extensive experience in the recreational property market, the trend is hot. “COVID seemed to change our mindsets about cottages and cabins. As we came out of lockdowns, people seemed to value their space and time more than ever. The demand for rec properties shot up with resulting price increases of the high demand.
“People who already owned rec properties prior to the pandemic saw their property values spike, and those who started looking to buy into the market had to pay a much higher price.”
He notes that, recently, the rec property market seems to have balanced out, and is at least not as heavily weighted to the seller. “Maybe it’s just that we are back to a more typical market where things slow down for the summer and pick up in the fall.”
Getting away from the hustle and bustle of daily life, enjoying nature and spending time with family and friends. There’s no doubt about it – from a lifestyle perspective, owning a recreational property is a good investment. Quality of life. More recently, the option of a satisfying work/life balance. But what about the financial aspects?
Caution! Beyond the dreams and wishes about birds chirping, jet skis revving and s’mores by the fire pit, lurks the basic logic of real estate, anywhere: Is it worth it? Is it a good investment?
Chris Richards, licensed mortgage broker with Calgary’s Richards Mortgage Group underscores that the financing aspects for rec properties is significantly different from conventional residential real estate.
“When rates were ultra low, there was a surge of property buying in all categories. Cheap money is inflationary and drove up the cost of all residential-use properties across the country, not just in Alberta.
He number-crunches the different financing aspects for rec properties. “Vacant land/lot financing is most often based on variable interest rates, typically Prime + two per cent. Those buyers were strained with increasing payments as the prime increased from a low of 2.45 in spring 2020, to a high of 7.2 by last July.
“Prime is still relatively high and even fixed rate financing is up three per cent from all-time lows, often straining over-extended buyers at mortgage renewal time.”
Stats show that about 11 per cent of Canadians own a recreational property, and around the same number of people hope to purchase one in the next couple of years.
‘Quality of life’ is by far the biggest motivator for getting a recreational property, as well as the traditional and sentimental goal of passing the property down to the family.
Ultimately, many practical rec property owners consider practical ROI factors about the dollars and cents of rec properties. With the opportunity to earn rental income, some consider their recreational property a long-term investment.
Now more than ever, the lifestyle lure of a recreation property is a potent factor as is the real estate ‘location-location’ strategy of being within a reasonable distance from Calgary. Financial planners and some mortgage brokers urge a more transactional strategy and hard-core money realities to temper the idyllic getaway hopes and wishes of owning a recreational property.
Richards urges weighing money strategy options about considering a rec property as an investment, particularly a quick-ROI investment. “When a person chooses to purchase an investment with debt financing, such as a mortgage, it is called a leveraged investment,” he says. “And leveraged investing exposes any investor – including rec property investors – to higher risks, like loss of revenue, negative interest rate changes and more.”
While the rec property strategy of ROI has merit, experts urge considering other factors. Like the potential of being a landlord and generating rental income, and realistic rental factors like location, accessibility, amenities and rental demand in the area. There is also caution about
the unexpected quirks of managing a rental property. The effort, the time and additional costs like marketing, maintenance and cleaning.
The experts note that traditional real estate shows potential for long-term appreciation, but in the recreational property market, there are certainly no guarantees.
The wisdom suggests researching possible tax deductions about a recreational rental property. In Canada, designating a rec property as a principal residence may qualify for the Principal Residence Exemption (PRE) for tax purposes. The PRE can help to reduce the amount of capital gains tax payable on the sale of the cottage, provided it meets the eligibility criteria.
Relevant rental expenses may be deductible from earnings; costs like advertising, insurance and repairs. The real number-crunchers also highlight likely tax issues, and the pros and cons of renting vs. designating the rental property as a principal residence.
Doug Koop shares the enthusiasm about rec property enjoyment and is also realistic about the traditional attitudes about owning a cottage or a cabin vs. the contemporary perspectives and rationale. “Rec properties are more of an investment in family time and recreation than a financial opportunity. Many rec property owners find that after owning for a few years, their ability to make good use of the property drastically diminishes.
“There are only a few months of opportunity as summer is short, especially in Alberta, and the carrying costs of these properties are high, as well as add-ons like the cost and maintenance of a boat. There is also the threat of municipalities tightening the restrictions on short-term rentals which help owners reduce their costs.”
Richards focuses on practical aspects (and speedbumps) of considering a rec property as an investment. “With any investment, one needs to look at the potential returns one can earn. Best case, middle case and worst case, plus valuing the effort it takes to earn those returns and manage the investment.
“While some people may be lured by HGTV programs about making elevated returns with short-term rentals, the question is how much intervention and effort does it take to earn those vs. a long-term rental arrangement? Also, what assumptions are made the ability to earn or capture those returns?”
He cites the example, what if a regulatory body such as a local government decided that short-term rentals were no longer permitted (as was the case in B.C.) and if the initial decision to invest was based on best-case returns? What if reliable local cleaning services are not available for turning over the property between rentals? What if someone posts a bad review?
“The bottom line is that real estate is NOT a passive investment as much as the CRA may say it is. It requires attention from the property owner or a property manager. The rec property rule of thumb is that the longer the distance away, the harder it is to manage.”
