It's Your Money  

Turn 2nd home into asset

You love your second home, but, to be honest, you’re not there as often as you’d like.

Maybe you have a big trip planned somewhere else this summer. Or, the kids now have jobs and you don’t feel like going to the beach house as much without them.

Either way, it’s a shame for it to sit empty. Especially since Canadian cottage prices are on a tear, and many people are looking for more “local” vacation ideas. Upkeep costs keep rising too, and that dock won’t fix itself.

Maybe it’s time that your second home brought in an income of its own.

How can you rent out your cottage with the least amount of hassles?

Prep your digs

The first place to start is to fix the little things, such as the ripped screen door or the exposed pipe.

Then, call your insurance company to make sure you’re covered for any damage during the rental period. Rentals must be specifically included on your policy and you should have at least $2 million worth of liability coverage.

Adding this to your existing policy can cost $200 or more a year, but is absolutely vital.

Gather your valuables and either remove them from the property or set aside in a locked closet or room. While most rentals go without incident, there is always the risk of breakage or damage.

Market your property

These days, most people use full-service rental websites such as Airbnb, Canada Stays, VRBO or Cottages in Canada. These sites either ask for a subscription, take a percentage of your rental income or pass on their fees to your renter, making the stay more expensive for them.

However, they ensure your cottage gets seen, and can help you take deposits, final payments and communicate with customers.

You can also bypass these by setting up your own website and facilitate the entire transaction yourself. You may not get as many eyeballs on your listing as you would on Airbnb, but you’ll be able to keep all the money you make.

Price your rental based on amenities, such as number of bedrooms and proximity to water or tourist attractions, and also on the going rates in your region.

On the ground

Unless you plan on driving to your cabin every time you have a new rental, consider hiring a management rental company. They’ll do everything from visiting the property and taking photos to advertising and paperwork.

Some will even include things such as concierge services and on-site private chefs for upscale properties.

A management agency could take care of things such as cleaning and emergency repairs so you don’t get a call at 2 a.m. with a problem.

Name your price

Price your rental based on amenities, such as number of bedrooms and proximity to water or tourist attractions, and also on the going rates in your region.

You can easily research the competition online and price your home competitively to increase occupancy. Most owners do dynamic pricing, charging more on weekends and for peak demand times, such as summer or ski season.

Pay attention to taxes

If you intend to rent out a cottage or ski chalet for many weeks of the year, there may be potential tax issues and this will likely mean more time spent tracking all of the income and expenses related to the property.

Your adviser or accountant can help you understand the issues and explain the bookkeeping requirements.

Revenues earned from your cottage are taxable, but you can claim expenses, such as a portion of what it costs to run the cottage, plus rental-related costs such as cleaning and property management fees, etc.

But in the end, don’t forget to book a week or weekend off for yourself, too. You may still get the urge to get to the cottage, even if it’s only once a year.

A sign(ature) of the times

In May, in response to the global pandemic, the B.C. government issued two emergency orders that suspended in-person execution requirements for:

  • Wills
  • Health representative agreements
  • Enduring power of attorney documents.

These emergency orders allow legal professionals to assist their clients, especially seniors and immune-compromised people, who wanted or needed to execute these documents, but couldn’t or shouldn’t travel from their homes.

The orders are tied to the provincial state of emergency and will expire when it is lifted.

But in this day and age, when you can sign most other legal documents digitally, why is this only a temporary measure?

Well, good news was announced last week by Attorney General David Eby in the form of proposed changes to the province’s legislation governing wills and estates that would make these provisions permanent.

“This modernization initiative was underway before the pandemic, but COVID-19 has made the reasons for these changes obvious to all British Columbians,” Eby said.

“With this change, lawyers and notaries will no longer have to tell very sick people that there needs to be a personal visit in the hospital, or a court application, before their wishes can be recognized,” he added.

Similar proposed legislative changes are being looked at across the country based on work by the Uniform Law Conference of Canada, which makes recommendations to harmonize and reform laws across the country.

This is great news for British Columbians, as well as other provinces that follow suit.

A recent survey found that 51% of Canadians don’t have a will and it is safe to assume that even fewer have a health representative agreement or enduring power of attorney document.

At the same time, the interest in getting ones’ estate affairs in order has risen dramatically.

A Toronto-based online will service reported a 620% increase in sales in early April vs the same time a month before. A similar spike in life insurance applications has been seen during the same period.

These very important things that many have been putting off for far too long are finally getting the attention they deserve.

Dying without a will risks having your assets distributed according to a provincial formula, which varies across the country. Minor children would go to whoever applies to be the guardian, even if it’s a relative they didn’t like. And pets most often end up in shelters.

It typically takes much longer to administer an estate and often leads to arguments among family members.

If one good thing comes out of the COVID pandemic, it will be that many people are finally taking the time to get their estate affairs in order. And these proposed changes to legislation will make it that much easier to do so.

Save money on a rainy day

With July starting in two more days, many are patiently waiting for summer to finally get started. A lot of people find themselves with a little more free time than usual this year while they sit indoors and wait for the storms to pass.

Good news, I have a simple idea for you to pass some time! Your next rainy-day project is to lower your interest rates on any debt that you pay. It helps to be prepared so during the next big thunderstorm, sit down and get started on a plan.

Before making any calls, you need to do your research. Compile a list of all of your debts and loans including what interest rates you pay on each one. Be sure to confirm which loans are locked in and which ones allow for early or penalty free repayments. 

Go online and find out what the best available rates are for the type of loan you are holding (mortgage, line of credit, car loan, etc.). Request a free copy of your credit score and see if there are any easy ways to boost it up a little higher. 

Once all of your research is done, it’s time to formulate a plan of attack. Depending on the flexibility of your debts, you may need to wait for a certain period of time with some accounts, but many changes can be done right away.  

If you are able to prepay your mortgage, or if it’s up for renewal, your advanced research can be very important. You need to know what others are paying right now. Securing a rate reduction of 0.5 per cent can mean knocking an extra $7,638 off your principal owing on a $500,000 home after five years! People do this all the time, but you often need to fight for it.  

Set up an appointment with your current mortgage provider and start by asking them what options they have for reducing your interest rate. If they don’t come down enough, you can next show them your research with the best options out there and ask them to match it. If they’re not willing to match, it might be time to start looking elsewhere.  

Your approach to your line of credit should be similar. Book an appointment with your lender and ask them what they’re willing to do. The more prepared you are for this meeting, the better your odds of coming out with a lower rate. For those who find the research and meeting preparation too difficult or overwhelming, speak to a certified financial planner to help you build your game plan.  

With credit card debt, you have two main options. Much like above, you can consider contacting the lenders and negotiating rates, but you may not get very far. A better plan could be to construct a debt consolidation plan and pay off any higher interest loans first while making only minimum payments on the rest. The common approach of “paying a bit down on every debt” is hurting you more than you know.  

Regardless of what approach you take, any small interest rate reduction can have a significant impact on your overall finances. Sometimes all it takes is a bit of effort to prioritize which debts to tackle first or moving a higher interest debt to a lower interest solution.   

It’s amazing to me that people will drive across town (and spend a couple of bucks in gas) to save $5 on the price of a small item but won’t put any effort into lowering their interest costs. For the same amount of effort that it takes to save that $5, you could save thousands of dollars per year in wasted interest.  

So on the next rainy Okanagan afternoon, set aside an hour to construct your own interest rate reduction plans.         

Don't spend more money!

I’m going to be really clear on this so listen up – please don’t go out and spend money right now. 

Tiff Macklem, the new Bank of Canada Governor addressed the House of Commons Finance Committee last week and said that “we’re in a deep hole, and it’s going to be a long way out of this hole.” He then went on to say that he has no intention of raising interest rates any time soon. 

That last part is likely all that some people heard. Interest rates are going to stay low for awhile so there’s no need to worry about over-extending on a new home purchase, right? 

Yes, it sounds like borrowing money will continue to be “cheap” for the foreseeable future, but this does not mean you should continue to rack up more debt. 

The Canadian consumer has been the primary supporter of the economy for quite some time now, but the money they’re spending to prop the economy up is not money that they actually have. Instead, Canadians keep taking on more and more debt in order to live a lifestyle that is well above their means. 

Digging our economy out of the mess that it is in (and has been in long before COVID-19 came around) will take some time, but it can’t be the consumer who continues to propel it along as the majority are quite simply broke. Canadian consumer debt is now a staggering 177 per cent of disposable income, and that globally record-setting figure is set to climb further still.  

As things start to reopen and various industries put out promotional offers to lure you in to spend money, it's imperative that you stop and think about what you can really afford. Due to the low interest rates, the monthly payments on that new car, financed purchase item or even a mortgage on a new home might sound “doable” in your monthly budget. But can you really afford it? And will that add to the debt load you are already carrying?

How exactly are you going to save enough for a comfortable retirement if you’re still paying off debt in the later stages of your working years? 

The highest risk category is definitely Canadians in their 30s who are taking on a first mortgage, kids, new cars, etc., all at the same time. But this addiction to debt spreads across Canadians of all age brackets. Everyone needs to start spending a little less.

The downside to this is that the economy is heavily relying on consumer spending to have any hope of a quick rebound but to be quite blunt, that’s not your problem. Your responsibility needs to rest solely on your own family and providing for your future. 

So, if you’re still reading at this point, and not too mad at me for ruining all your planned fun, please take a few moments before you make your next big (or small) purchase to consider what you can really afford. The interest rates are being kept at historical lows so that the economy can do its best to recover, not so that you can go on another shopping spree.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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