Wow. 2020 has arrived – the beginning of a whole new decade, and a new chapter in our lives. This year, we are kicking things off with a bang.
Hopefully you all had a wonderful holiday season, and after exercising sound financial planning and restraint, you are enjoying the rewards of a financially stress free January.
As it turns out – at the Freedom 101 household we spent a little bit more than we had planned too over the holiday season.
And by a little bit – I mean A LOT. Here’s the backstory.
How We Epically Blew Our Christmas Budget
For many years, Mike and I have been contemplating buying our first vacation rental. In fact, we’ve been actively watching the market in our desired area for over 6 years. But timing wise, things just never seemed to work out.
Either the right place was just out of reach of our current financial means, nothing quite right was on the market, or the market was doing some pretty weird things.
At times we felt very frustrated, but tried our best to remind ourselves to just be patient. There was no rush to make this type of purchase.
There is also no shortage of debate over whether vacation rentals are actually a good investment. And we have certainly gone back and forth on it over the years.
Capital and time invested versus actual returns. Is it really worth it?
So Why Buy A Vacation Rental?
We’ve got plenty of experience managing long term rentals. Combined, we bring 20+ years of land lording, and all that it entails, to the table. But short term rentals? Well that’s a whole other beast, and this would be our very first crack at it.
But we have a few reasons why we think it’s a good choice for us:
1 – We are positioned to comfortably pay for the operating costs of the property, even if we get zero rental income. So from a financial standpoint, we can afford it. While certainly not reason in itself to make any purchase, this hurdle has to be met for us to go any further in our evaluation.
2 – Investing in real estate and managing rental properties is historically one of our strengths. Mike is awesome at marketing, and dealing with tenants. While I get to be the designer, handy woman, and spreadsheet to my Excel addicted hearts content. In short, we actually have fun doing this stuff.
3 – We have always wanted to own a property on the water. A place that we can personalize, and take our boys to year after year, and one day (hopefully) host our kids families. We jokingly refer to it as our legacy property. The place where we’ll make all kinds of lasting family memories, but can also be offset by rental income so it doesn’t turn into a financial burden.
But it’s not all roses. There are definitely some potential downsides to buying our first vacation property.
Undoubtedly it will entail a fair amount of work for Mike and I to manage. We’ll have to deal with multiple short term tenants year round, and all the headaches that can bring.
Running a short term rental has some pretty major upfront costs as well. Such as furnishing and equipping it. Dealing with initial vacancy rates while you build a base of solid, return clientele.
Not to mention a much higher rate of wear and tear on the property. Translating to more maintenance, and more frequent repairs.
Oh, and did I mention that insuring a short term rental property costs an arm and a leg? Yeah, about four times the average cost of insuring a typical rental. Ouch.
What About Market Conditions?
Our preferred area happens to be the Okanagan Valley. If you’ve read my blog for awhile, you’ll know that this is the area of British Columbia that I grew up in. Its chalk full of beautiful lakes, hiking, camping, golfing, skiing, and a whole lot of wine. (Including my all time favourite – Origin Wines.)
Fortunately, it also means I have a lot of local area knowledge and connections. Which is extremely helpful when you’re looking at managing a rental from afar.
But, it also happens to be an area that garners a lot of tourism from our neighbouring province, Alberta. As a result, the short term rental market is heavily influenced by Alberta’s economic stability. With pipeline wars raging, things aren’t looking so hot for our oil reliant neighbours.
The heavy influence of Albertans on the Okanagan tourism industry was hugely apparent in recent years when their province experienced a series of natural disasters, including major flooding in the South, and severe fires in the North. During those years, the normally packed Okanagan beaches were notably sparse.
All that to say, we can absolutely expect to see some serious fluctuations in tenancy rates over the coming years, for a wide range of reasons.
Real Estate in the Okanagan
On the plus side, the real estate market in the Okanagan has not only seen some stagnation recently, but some actual decline in market pricing since it peaked in early 2017. This has translated to the closest thing to a buyers market since 2012.
Meanwhile, interest rates have remained at all time lows, making it a good time to secure financing at rock bottom rates.
BC’s Speculation Tax
While some of the valley’s market slow down can be directly tied to Alberta’s declining economic state, the introduction of a speculation tax brought in by the former BC Liberal government also has a lot to do with the current state of things.
The speculation tax was intended to deter both foreign and domestic investors who were purchasing properties for speculation purposes, and then letting those same homes sit vacant.
With a hefty shortage in available rental properties in specific BC markets, the tax is only applied when the property is not rented more than 6 months per year. With rentals less than 30 days exempt from that 6 month cumulative total.
That means, for the most part, short term vacation rentals pay the tax. And it’s not cheap. For Canadian citizens, the tax rate is assessed at .5% of the properties assessed value. (If you’re a foreign owner, get ready to pay a hefty 2% tax on the properties assessed value.)
Lucky for us, as BC residents, we’re eligible for a $2000 tax credit. That brings our estimated annual speculation tax to $500-3000, based on our budget range of $500,000 – $1,000,000.
Interestingly, half of the Okanagan Valley falls into the speculation tax area, while the other does not. Definitely something worth considering when we were deciding on our desired area.
So….Will We Actually Make Any Money Buying Our First Vacation Rental?
The reality is, for the first several years, it will cost us substantially more than just renting a place for our family. And, as a secondary property, with a required downpayment rate of 35%, it will tie up a substantial amount of capital.
But like most investments we make, this one is a long term play. And much like paying off our mortgage, it’s a decision that involves more factors than just the money.
Conservatively, after 3-4 years of ownership, we should expect to average a net annual income of $10,000-$15,000. Factoring in a reasonable amount of personal use, and ignoring the potential for equity gains.
That’s not exactly huge ROI when compared to the capital we’ll be investing.
So the biggest question of all – will we actually get enough personal use to justify buying our first vacation rental?
Honest answer – I don’t know. But everything points to yes.
We love going up there and escaping the city. My family lives in the area giving us many reasons throughout the year to go up. And the 3 hour distance from our home makes it really practical, even when it’s just a regular weekend.
Bottom Line
After weighing all the pro’s and con’s, we decided that financially we were at the right place to pull the trigger.
Not to mention, we think it will be a fun challenge. And an interesting addition to achieving the right balance in our post-Financial Freedom lifestyle.
Check back next week and I’ll walk you through how we narrowed down our search, what exactly we ended up buying, and our thoughts on our first couple weeks staying at the property!
2 comments
Wow, you weren’t kidding when you said you epically blew your holiday budget. But I don’t think that this was an impulse buy at all.
We have invested in long term buy and hold properties but like you have never ventured into the short term rental market. I will be avidly following your journey to see how things progress.
Congrats on taking the plunge.
Thanks Maria! We are super excited to see where this challenge will take us (and also, very excited to use the property with our family!).
I am very interested to see the real numbers when it comes to profitability vs. time invested when compared to our longer term rentals, so I will be sure to share all those numbers as we go along!