Why you should probably never want to own a cottage

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Wealth adviser Ted Rechtshaffen understands the appeal of owning a cottage – but, he says, for both personal and financial reasons, he has no plans to buy one anytime soon

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As you read this on a hopefully beautifully sunny and warm day, sitting on your dock on the water, what could be better than being at your cottage.

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There’s no doubt that it can be enjoyable, but do you really have to own it to enjoy it?

Occasionally, clients ask us for our opinion on the purchase of a chalet. This question usually leads to a broad discussion where the financial equation is only part of the picture. Their stage of life, age of children, desire to explore or stay put, comfort with maintaining the property, and even their experiences growing up play a big part in deciding whether or not to buy. .

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For me, I’m pretty sure that at this stage of life (with three school-aged kids) we’re not cottage buyers. I know not everyone will agree with this opinion, but I know it’s the right decision for me and my family. Here are five reasons I won’t buy a cabin.

  1. Trying to juggle our children’s summer plans leaves only two to four weeks of possible time for the children at the cottage each summer. At another stage of life, owning a cottage might make more sense.
  2. We want the freedom to explore different parts of Canada in the summer (maybe even beyond Canada), and we don’t want to feel tied to one place. Plus, we can rent a chalet that’s perfect for our children’s age and stage, both in terms of water safety and places to visit within an hour of the chalet.
  3. I can’t fix anything myself. My wife is pretty good at it, but neither of us wants to spend our time working on the property or even feeling guilty about what needs to be done. We want to take advantage of it.
  4. Financially, there are better investments. Over the past 35 years, residential real estate in Canada has grown by an average of 5.4% per year. Over the same period, North American stock markets have averaged returns of 10% or more. If the growth is tax exempt on a personal residence the gap is smaller, but for a cottage there are usually capital gains taxes to deal with. For those who say you have to deduct investment management fees from the returns, that may be true, but you’ll also have to deduct property taxes and non-capital expenses from the cottage return. When looking at the options, I prefer not to lock up my capital in a cottage.
  5. Finally, no more worrying about friends and family. I know many families like to invite people over to their cottage. It is often greatly appreciated. However, it can get very tiring after a while, and when it’s not highly appreciated, it can become a real drain on the relationship. When renting, you may occasionally invite people to join you, but they know they don’t expect the annual invitation.

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There are, of course, many benefits to owning a cottage. Among them:

  • Pride of ownership. Invest your time and effort in making the chalet your own.
  • Not having to pack a lot as the chalet already has much of what you need.
  • Being able to have your own cottage toys — boats, furniture, snowmobile, etc.
  • Have the option of renting the cottage to help defray operating costs.
  • Being able to make a last minute decision to head north.

So what does this cottage property really cost?

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According to the 2015 RE/MAX Recreational Property Report, you might see the following median prices in key waterfront property markets in Canada:

Penticton, BC $778,500

Sylvan Lake, AB $798,900

Lake Winnipeg – East Shore, Man. $295,000

Sudbury, Ont. $289,117

Collingwood, Ont. $552,500

North/South Shore, PEI $135,412

East Coast of Newfoundland $205,000

Let’s say you buy a $500,000 cottage in Collingwood, Ontario.

    • Mortgage expenses: While rates are certainly cheap today, you should ideally be borrowing against your primary residence, as getting a mortgage on a cottage property is more difficult and usually more expensive. If you deposit $200,000, a five-year fixed mortgage of $300,000 will cost $1,350 a month, with just under half of that amount being interest.
    • Land Transfer Tax: These vary by municipality, but in Ontario they can easily be 1.25% of the purchase price or more. A purchase price of $500,000 would result in land transfer tax of $6,475.
    • Complete the Cottage: You need a second set of everything. You can go cheap or not, but crockery, cutlery, tables, chairs, lamps and beds will not only take a lot of effort to pile up, but will definitely add up. Allow at least $5,000, unless a family member has a lot to give.
    • Add the toys: a boat, water skis, water tubes, gasoline for the boat, a kayak, a canoe, etc. — $10,000 will barely get you started.
    • General Maintenance: Although it obviously depends on the size and age of the cabin, most people should budget between $5,000 and $15,000 per year for repairs and maintenance.
    • Property taxes and insurance. Although there is a lot of variability, a $500,000 cottage would likely cost $4,000+ for taxes and insurance.
    • Utilities: Much will depend on whether it’s winterized or not, or the rare cabin with air conditioning (I know – it’s not a cabin anymore). Allow at least $250 per month for electricity and gas, and add an additional $100 for phone and internet. It’s over $4,000 a year.

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[np_storybar title=”What to do with your pot of housing gold” link=”http://financialpost.com/personal-finance/mortgages-real-estate/what-should-you-do-with-your-million-dollar-home”]

What if you were sitting on a pot of gold worth $1 million and you thought someone might come and take it at any time?

[/np_storybar]

In summary, a $500,000 mortgage can have the following one-time costs: $200,000 in capital, $6,475 in land transfer tax, and $15,000 to $50,000 for toys and furniture. Annual costs would include $16,200 in mortgage repayment charges (at a high interest rate) and $15,000 to $20,000 per year for taxes, insurance, utilities and general maintenance.

Even if you removed all other costs except mortgage interest and annual expenses, you would still have perhaps $25,000 in actual costs per year. That covers a lot of really enjoyable vacations!

Many people talk about cottage memories that represent some of the highlights of their lives. For these people, if they can afford it, owning a cottage is the right decision. I understand the allure and can see many benefits. However, for many reasons, including financial ones, this is not the right decision for me.

Illustration by Chloe Cushman/National Post

Ted Rechtshaffen is President and Wealth Advisor at TriDelta Financial, a wealth management firm specializing in investment advice and estate planning. tedr@tridelta.ca

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