Pros and cons of investing in a second home

Investing in a second home is a dream for many Canadians, but what are the benefits and disadvantages of such a purchase? Whether you're using the second home as a source of income or a vacation home, consider the following pros and cons before making the investment in a second property.

Depending on whether you plan to use the property as a holiday cottage, a home for immediate or extended family or to rent it out for additional income, the cons of owning a second home include the following:

• Initial cost. Buying a property takes a large financial investment, and it means that a substantial proportion of your assets are tied-up in the property market. Prices of houses soar and drop, so buying a second home is a long-term investment that may take many years to show a return on investment. It often takes a while to sell a property, so the money invested is not quickly available.
• Renovations. You may need to work on the property to bring it up to par. This costs money, time and effort, whether you do the work yourself or subcontract.
• Ongoing expenses are doubled. You are now maintaining two homes, with all their relevant costs. Extreme weather events such as heavy snowfalls or floods tend to damage property that needs to be attended to quickly, and tenants in a rental property may damage the house. Property insurance needs to be taken out on the second home.
• Mortgage insurance. As of May 30, 2014, the Canada Mortgage and Housing Corporation (CMHC) stopped offering second home mortgage insurance, which, according to RateHub, means that lenders are now requiring a 20 per cent down payment on second homes. However, certain private insurance companies and banks offer second home mortgage insurance in selected circumstances.

While there is a downside to having an additional property, there are also valuable benefits in owning a second home:

• Financial gains. According to the Investor Education Fund (IEF) on their Get Smarter About Money website, if you rent out a second property you may pay less tax because you can deduct expenses from rental income. In addition, you receive a regular monthly income from tenant payments.
• Enjoyment. Whether your second home is on the side of a glorious mountain, alongside sandy beaches or tucked away in the woods, you'll be living out your dream of owning a getaway for long weekends and holidays. As you return time and again to your second home, you'll get to know the local residents and become part of the community.
• Retirement. If your holiday home becomes your retirement residence in the future, you can sell your primary family-sized residence in the city.
• Convenience. Leaving all your sporting and vacation equipment at your second home is very handy as you don't have to lug it into vehicles or onto planes every time you go away.

The best thing to do when deciding if investing in a second home is for you is to research possibilities, check costs and spend time thinking about it.