Buying a cottage for pleasure may necessitate renting it it our for profit to help cover some of the operating and maintenance costs. Renting your cottage can be financially beneficial if you want to use the income to pay taxes and utilities like hydro and phone. But don’t expect to get rich from the rental income and try to pay a mortgage with it, especially if you plan on using the property too. If done properly you can easily cover your operating expenses for the year.

It’s important to remember with renters comes work. A friend of mine who owns a two bedroom condo in Whistler and rents it out to cover expenses gets calls from irate guests at all hours of the day. One person even called to complain about traffic on the Sea to Sky highway?!!!!

While there is no such thing as easy money, I do believe in using a rental management company, especially if I know I’m not able to respond quickly to renter’s concerns and I don’t live nearby.

When it comes to selecting a rental management agency, Heather Bayer, author of Renting your Recreational Property for Profit, recommends people consider the following:

Types of Agencies

Check first with the agency to determine their renting criteria. For example, some agencies may insist on having the property available for rental for a certain number of weeks, including peak season and other holiday periods. It may not be worth their while to spend money advertising and marketing your cottage if you’re going to be spending a lot of time there yourself. This means you may not be able to pop down on the spur of the moment. The rental management agency’s contract should cover owner occupancy, so make sure you agree on this before signing it.

Agencies have two customers: you the owner, and the renter. The agency representing your property should deal promptly with both parties. If it doesn’t than you won’t get the customers you need to rent your cottage effectively.

Booking Agencies

The upsurge in demand for cottage style vacations has led to an increase in the number of rental agencies in Canada. Many concentrate in a single region, while the larger ones have many properties ranging from basic cabins to luxury high end homes. Most offer booking service only. They will inspect the property, advertise it on their website, process contracts and rental agreements. However, they do not have the facility to manage rental changeovers, check for damage and cleanliness, or respond to any problems that may arise during rental.

Full Service Agencies

Full service agencies will undertake the same tasks as booking-only agencies but will also offer additional services. Examples of these services include: guest care, maintenance or emergency repair, linen rental, cleaning, bicycle and equipment rental. It’s important to determine what you require from an agency.

Travel Industry Regulation

The Travel Industry Council of Ontario (TICO) regulates travel companies in Ontario ensuring compliance with the Ontario Travel Act. All agencies offering vacation homes for rent on behalf of a third-party, should be registered with TICO. The alternative is an agency that has a connection with a realty brokerage and who operates a Trust Accounting system in accordance with provincial real estate regulations. If you list your property with a management agency not regulated in this way, you are putting your rental income at risk.

Ask the Right Questions

When you start looking for an agency, prepare a list of questions to ask. In this way you can be sure you’re asking each agency the same question and can compare answers. Ask for their information package to be sent to you so you can compare their commission rates. You shouldn’t expect an agency to give you an estimate of rental potential without first visiting your property.

A reputable agency will provide information on the following:

• Operating policies
• Where they advertise and market their services
• What experience they’ve had on managing properties
• Testimonials from current owners registered with them
• Their website - you should pay close attention to how it looks and if it promotes year-round rentals

Agency Rates

Commission rates rates vary from 12% to 30%, with a renters booking charge between $25 to $65 per week. Some charge a flat commission rate that is only payable when the cottage is rented.

Viewing

When you contact agencies, they will want to arrange a viewing of your property. Even if you’re inviting several agencies to view, expect them all to take photographs and carefully question the facilities and amenities available, and any restrictions you may want to impose. Make sure the cottage looks its best, as photographs will reflect the way it looks on that day.

Prepare in advance of the booking a detailed sheet listing room dimensions, bed configurations, additional features and kitchen appliances.

Making the Decision

Good agencies will provide you with references from their clients, so look at their websites and property lists and ask for references from cottage owners of your choosing. Select properties in your rental price bracket.

Renting out your property takes time and energy. Some people prefer to save money and do it themselves. Getting a good agency will save you a lot of money and frustration. My friend with the condo in Whistler has slowly come to realize this and is now shopping for a rental management company.

Cheers,

Julie

There is no easy way to simply give the cottage to your children at least not where the government is concerned. Whenever there is a change of title on the property, including transferring it to your children, the property is treated as though it was sold at fair market value, and you (or your estate) are liable for the tax on the capital gains from the sale.

Given the value of today’s waterfront properties, the taxes, assuming it’s not your principal residence and therefor exempt from capital gains, can be enormous. What started off as a gift to your children could quickly become an enormous tax burden.

There are several ways to bequeath a property to your children. Once you’ve made the decision regarding who gets what, it’s best to meet with a lawyer and a tax specialist to determine the best solution for your family. The following options are from Douglas Hunter’s book, The Cottage Ownership Guide.

1. Simple Bequest - the property is left to the children in a will upon the owner’s death. This works best where there is minimal or no capital gains taxes to be incurred. The down side to this is the delay in transfer of title and the probate cost incurred during the probate period.

2. Gift the Cottage to Your Children Now - transfer the ownership of the cottage as a gift, either all at once or incrementally. While the change in ownership triggers immediate taxable gain based on fair market value, any additional capital gains won’t have to be paid until the recipients dispose of the property themselves. Parents need to secure a “life-interest” in the cottage, to be able to continue to have a legal right to use it and protect it from being sold.

3 . Sell the Cottage to the Children Now - If the parents are unable to pay the taxes or wish to free up capital to enjoy other pursuits this option secures the property for the children who want to hang onto it. Capital gains still have to be paid but it avoids probate costs. The cottage can also be sold incrementally to the kids to break up the annual capital gains burden.

4. Make Your Children Joint Tenants - You and your children each share an equal and undivided ownership of the cottage. The property is considered to have a single owner. As the original owner your rights become limited and capital gains are triggered. It does allow the property to be passed from directly to your joint tenants without paying probate fees.

5. Transfer the Cottage to a Living Trust (Inter Vivos) - You no longer own the cottage but have control and benefit from it. This is only available to person 65 years or older. There are no probate fees and no capital gains at the time the trust is created. However, it is more expensive to establish and maintain a trust than a simple bequest. A trust will provide a shelter from capital gains for a maximum of 21 years only.

6. Establish the Cottage as a Non-Profit Organization - This might be a good solution where there is a large property and many family members. Members pay dues similar to a club for access to the property. Successive generations can use the property without paying capital gains tax or probate fees. The initial transfer of the property will likely trigger a capital gain. There is also the ongoing expense of accounting fees.

If you would like more information on how to bequeath the cottage to your children Hunter’s book, The Cottage Ownership Guide, is an excellent, easy-to-read guide that explores the pros and cons of each option in greater detail. Peter Lillico’s website www.lbkglaw.com is another excellent online resource.

Cheers,

Julie

This week we are looking at ways of keeping the family cottage well - in the family. There are many issues that need to be addressed including financial, suitability and legal - all have become increasingly complex with each passing year.

Choosing the Right Child

Today we are going to examine suitability. What happens when you have more than one child? What happens if the child that really loves the cottage can’t afford the maintenance costs? What happens if both children want the cottage, but are unable to get along with each other?

When deciding which child or children should carry on the family cottage Douglas Hunter, author of the book The Cottage Ownership Guide, recommends people consider the following:

1. Why are you handing down the cottage
2. Who is going to have it
3. Is this something you’ve talked about with the kids
4. Have you sat around the table and said this is what we’re thinking of doing with it

Hunter says, “A lot of times the parents are going to be really surprised by what comes out of these conversations. They’re going to find out that the kids don’t even particularly want the cottage.” Hunter has found that owners think they’re suppose to leave the cottage to their children, “C’ause that’s what moms and dads do,” but that might not be the best thing for anyone.

When deciding which child or children should be chosen to carry on the family retreat the following issues need to be addressed:

1. Level of interest of each child - if he or she is not enthusiastic about cottage ownership, with all responsibilities and costs then including them in the cottage plans may result in long term incapability
2. Geography - distant children may not be able to contribute equally to maintenance and chores, which may be resented by the ones who live closer and who end up carrying the load
3. Affordability - capital gains issues aside- if your child is struggling to financially, they may not be able to afford their share of expenses especially with increasing property taxes. A trust with a reservoir of funds can be set up to pay for taxes, maintenance and repairs.
4. Personalities - if siblings don’t get along prepare a co-ownership agreement while you, the parents are still alive and able to mediate.
5. Is it possible to sever the property into separate lots for each sibling?

Compensation

If not all children are chosen or willing to carry on with the cottage, should the others be compensated or ignored? Peter Lillico, a lawyer who specializes in cottage disposition recommends parents who wish to provide some balance among the children leave the non-cottage child more of the other assets, or provide insurance to even things out.

If the estate assets are not sufficient to do this, then perhaps the cottage owning children should contribute to the compensation or allow the child who is not included a “Life Interest.” They would be able to enjoy the cottage while alive, but would not be responsible for sharing the full costs, nor be able to leave an interest in the cottage to their heirs.

Tomorrow we will look at the financial implications for handing down the cottage.

Cheers,

Julie

Jumping on my father’s white freckled stomach as he floated around Rice Lake on an inner tube in the hot July sun is just one of my earliest cottaging memories.

Grabbing our sun-burnt bodies he’d launch my siblings and me up high into the air over his shoulders. Screaming with terror and delight we’d crash into the warm weedy waters, popping up moments later, and beg my father to throw us again and again.

Growing up, my family cottage was a source of joy and excitement, a place I couldn’t wait to get to and a place I never wanted to leave. It would take 20 years before I was finally able to afford my own cottage with the hope that one day my children too would experience the same joy and delight I had growing up. But for many of us fostering the dream of someday passing our summer retreats onto our children, it may be just that - a dream.

When it comes to handing down the family property, most people wait until it’s too late. There are steps cottagers should be taking now to prepare for the eventual disposition of the property, particularly if they are planning on leaving it to their children.

I had the opportunity at last year’s spring Cottage Life show to hear Peter Lillico, of Lillico Bazuk Kent Galloway, Peterborough Ontario, present on this very topic, Cottage Conundrum: Keeping it in the Family.

Lillico states the Cottage Conundrum is that the tax system, financial realities and family dynamics are all critical obstacles to achieving the generous goal of ensuring the cottage stays in the family.

This week we will look at these obstacles in more detail and examine financial solutions like taking out insurance policies, declaring the cottage a primary residence or having the children assume ownership at an earlier age as some of the ways of managing the financial obstacles.

If you are going through this exercise right now, I invite you to share your experience with us.

Cheers,

Julie

Flipping through the March/April edition of Cottage Magazine, I stumble upon this headline, WHAT KIND OF COTTAGER ARE YOU? The article references La Casa Lakeside Cottage Resort, a new housing development situated midway between Kelowna and Vernon B.C. on Okanagan Lake.

These recreation properties are not actually on the water, but have water views, in addition to a pool, recreation facilities, your own private golf cart, and a boat slip. Can you really call these year-round homes with granite counter tops, gas fireplaces and plush interiors a cottage?

Maybe not 25 years ago, but today’s cottage is not the one your grandparents owned, or anything we experienced growing up on Rice Lake, Ontario. Resort developments, Deerhurst aside, were unheard of 10 years ago, but with cottages in Alberta and B.C. exceeding the $1 million dollar threshold, fractional ownership and condominiums developments are an affordable way to own a piece of paradise compete. Some of them even come with tennis courts, community centres and babysitting.

Cottagers’ tastes seem to be changing too. We’re becoming soft - more civilized. We need our creature comforts and are unwilling to part with them even at the cabin. Necessities like: dishwashers, Internet and satellite TV’s are just some of our must-haves.

Would I object if our cottage association decided to install tennis courts? No on your life, in fact I’d be downright thrilled. Or how about a skateboard park? Great idea.

What kind of cottager are you? Do you want to get away from it all and be left alone in peace, or do you want to escape to a resort like setting where in addition to the lake, you have all the amenities of home?

Cheers,

Julie

In case you missed the article, Retire to the Cottage, in the March/April edition of Cottage Magazine (page 46-47), and you’re considering retiring to your vacation property, it might be worth picking up a copy. OK, so I’m the author, but all that aside writing this article made me stop and think about where and how I planned to spend my retirement years.

Thanks in part to the B.C. government’s new “green” budget, hefty taxes are being slapped on gasoline. This makes owning and maintaining a cottage on Vancouver Island increasingly expensive. The cost to take the ferry is up 28% over last year as a result of fleet upgrades and with rising gas prices. We currently pay $200 round trip. Assuming the cost to take the ferry rises 10% annually, in 15 years I can expect to pay $835 round trip.

And then there are the property taxes. Escalating property values continue to drive up my annual assessments. In 2007 our property was assessed at $292,500. Our tax bill was $1,284. This year our property is assessed at $365,200. I estimate our 2008 tax bill will likely be $1,600. Our taxes increased 25% in this year alone. Assuming a conservative increase of 10% a year, in 15 years our tax bill will be over $6,000. These inflated tax bills are are forcing many long-term cottagers out of their waterfront properties.

While most of the article tends to focus on the social issues of living at the cabin year round, building a new social network and adjusting to reduced amenities, it was Ralph Hahmann, a financial adviser with Dundee Wealth Management, who made me realize the financial implications are just as important. Hahmann recommends people talk to a tax planner, not an income tax prepared but a tax planner.

When it comes to retiring to the cabin, most people, myself included tend to think more about the lifestyle and the physical dwelling rather than financial sustainability. I now realize it’s equally important to have my financial house in order too.

Cheers,

Julie

Today’s Blog comes from Deborah DaSilva, a cottager and mortgage agent with Mortgage Intelligence. It has been edited slightly for content and sizing requirements.

All across Canada we’re seeing the recreational property market continue to go through the cedar-shingled roof. Industry experts predict another year in which buyers seeking a property may outnumber the recreational properties available.

Traditionally financing a recreational property is more challenging than funding a principal residence. Lending institutions typically find second homes a much less desirable investment. Purchasers are often advised to take out a home equity line of credit or a second mortgage on their principal residence in order to buy the recreation property.

For example, when we purchased our cottage in the Haliburton Highlands in southern Ontario, we used a home equity line of credit from our principle residence - 25% as a down payment and the remaining 75% we used a line of credit based on the value of our cottage. We actually financed the entire purchase.

When people inquire about financing options, my first question is usually, “Is your home free and clear?” Taking out a line of credit on a home’s equity versus adding a second mortgage is much easier. People can have it for a fixed term with 25 year amortization payments. They can also allow the interest rate to float or lock it in, but the fixed rate on a line of credit is the same as a five year mortgage rate.

The added benefit to using a line of credit is as you pay it down, more credit becomes available that can be used to perform renovations. A line of credit is not for everyone. If people are not disciplined in their spending and keep using up the line of credit, then this is not the right instrument. I recommend my clients use it only to increase of their property or to maintain it.

We are also beginning to see that some lenders have developed flexible new mortgage products and policies that are specifically designed for the recreational property/second home market.

Previously vacation properties that were on seasonal roads, only accessible by boats, did not have central heating, or built on cinder block foundations were previously considered ineligible for financing. Now these same residences can be financed. While the rooms do not have to be separate, the property still has to have a kitchen, bathroom and common area.

It is wise to do your homework first. In today’s heated recreational property market, some purchasers have an edge in the marketplace because they are cash buyers. Buyers who are financing their purchase may want to consider talking to a mortgage professional to determine approximately how much they qualify for before launching their search.

Thank you Deborah,

If people have questions or would like additional clarification, I invite you to visit Deborah’s website at www.yourmortgagesource.ca.

Cheers,

Julie

When Andrea, and her cousin Sue, along with their combined four children walked into their rented condo in Whistler this past Christmas, they gasped. The carpet was full of mold. In fact it was so bad, they couldn’t take off their shoes. The bathroom was even worse. At $220 a night they were angry and disappointed. This was not a wow experience for these vacation renters.

Renting properties via the Internet is a little like playing Russian roulette, you pay your money and hope for the best. The owner of this condo is actually doing themselves a huge disservice. Sure they may make money in the peak times, but this unit likely sits empty the rest of the year.
Goal is to Have Repeat Customers

If you currently rent out your summer cottage, or your are considering doing so to help cover some of the costs, one of your major goals should be to establish a regular clientele – guests that come back again and again, book a year in advance and come for out-of-season weekends, and rave about your property to their friends, relatives and work colleagues, writes Heather Bayer, a.k.a CottageBlogger, in her book, Renting Your Recreational Property for Profit.

Referrals are the easiest and most inexpensive way to attract renters. It’s also important to note that it’s not one thing that creates a wow effect, but rather a series of well orchestrated, thought-out steps that will exceed a renter’s expectations.

First Impressions Are Critical

Bayer explains, “The WOW comes from that first impression - as you enter the driveway, see the cottage, open the door etc. Check the approach to the cottage and make sure it is attractive. Hanging baskets, flower tubs and flower shrubs do the trick, but make sure they can be watered regularly, or choose varieties that can withstand hot, dry conditions and can go a week without water.”

She also notes, “Remember that sound and smells are important which is why we always leave the radio on Classic FM, and ensure the place smells really fresh. There is nothing more off-putting than old cooking smells or musty/damp odours. If the latter is a problem it cannot be masked with air fresheners. You may need to purchase a dehumidifier to take some of the moisture out of the air. I would caution against strongly scented air fresheners as they can cause allergic reactions in some people. Fresh, fresh, fresh is the key!!”

No Surprises

Make sure the guests know what to expect before they arrive. The pictures of the unit need to be up-to-date and provide as many details as possible. It’s great to have someone there to greet the guests, and provide a brief overview of the cabin or condo’s basic operations i.e. fireplace, hot tub, parking passes and garbage disposal.

Make Sure They Can Get In

If you can’t be there is person, use a lock-box and store the keys inside the unit, or pay the extra money and install a Weiser Keyless Entry System. (www.weiserlock.ca/wei-eng/powerbolt/default.htm they cost $95. This will help avoid the hassle of replacing lost keys.

Welcome book

The importance of this cannot be overstated. Bayer devotes a whole chapter to this in her book. The book should contain the following:

• Clear instructions for operating fireplaces, hot tubs, and appliance
• Policies on smoking, telephone, pets, garbage collection and additional visitors
• Emergency contact numbers including walk-in clinic, fire, police, including yourself or your property management company, how to handle noisy neighbors
• Local information on activities taking place that season
• Where to eat – very important – provide list of restaurants and telephone numbers ranging from high-end to family friendly. Note any delivery services

There are many things owners can do to create a wow experience and most of it is just common sense and empathy. If you’ve had positive rental experiences, I would love to hear about it.

Cheers,

Julie

Everyone knows that owning a cottage is an expensive proposition, especially because there is always a “project”on the go, or maintenance that needs to be done. Sometimes Bill and I will do the work ourselves, other times I will beg Joe Flareski or Stu (our very handy neighbours) to give me a hand. For the big jobs I will hire a contractor, like I did last summer when we installed three new solar panels and expanded our battery pack. In any case, whenever we do any work on the cabin I make sure that I stash all of the receipts in a special envelope and remember to bring it home at the end of the summer. Why? Capital Gains.

Unless your cottage is your primary residence, than it will be subject to capital gains tax, which is based on its fair market value at the time it changes ownership. There are ways to defer paying the tax, and a good accountant and lawyer can assist you with these, but at the end of the day capital gains will have to be paid.

The amount owed can be offset by improvements that increase the value or extend the life of the property.

Most renovations and upgrades are made within the first couple of years of acquiring a property; it’s important to keep a financial record, especially if you hired a contractor or third party. Their labour is deductible, mine is not. Ten to 15 years from now, I’m not going to remember how much the new dock cost, or what we spent installing the deck. Keeping a paper trail will minimize our tax bill and result in more money in my jeans, not the governments.

So for the rest of the day, I will be combing through my visa bills, highlighting and photocopying, as well as trying to track down my bill for the electrician, wishing I was better organized. I like to use the last day of the year to tidy up loose ends and get ready for the next.

Happy New Year’s

Cheers,

Julie

When it comes to buying a cottage, the most rational of human beings seem to lose it. We see the lake, imagine ourselves barbecuing on the deck, our children jumping off the dock, and it’s game over. What should be a rational decision quickly becomes an emotive one. One of the key selling points of our cottage was a little frog game my son discovered in one of the bedrooms. The bunk beds were another. I honestly didn’t realize that our cottage was “off the grid” and what kind of lifestyle that would entail until after we bought it. It didn’t matter. It was love at first sight.

Chris Winney, a real estate agent with Royal LePage, in the Land O Lakes area in south eastern Ontario, and who lives year-round at her cottage, has developed “PAWLOST.” She uses this tool to help her clients evaluate a property’s true value. “Buying a cottage should be an emotional experience. People are buying these properties to make family memories,” says Winney. “PAWLOST describes what buyers are looking for.” She finds it helps her clients stay grounded, so they can find the right property and make a good investment.

PAWLOST Evaluating a Property’s Value

• P - Privacy - It’s nice to have neighbors, but not close enough to have to interact with them. Check for trees, if the leaves are in full bloom and you can’t see them then it’s OK.
• A - Access - Is the property accessible for all four season; can you get to it in the winter; is it accessible by road not boat? Generally, if a property is difficult to get to, it should be reflected in the asking price.
• W - Waterfront - Incredible privacy, level or gently sloping lot, sandy beaches, no weeds, and gorgeous for swimming, this is the first best choice according to Winney. “You want to be able to walk down to a level sandy beach and have the water deep enough off so you can dive in off the dock.” Steps that go down to the waterfront reduce a property’s value. One thing buyers need to be aware of is, who owns the waterfront. In southern Ontario, some townships own the 66 foot shoreline allowance. Cottagers can buy their allowance, and will have to do so if they are seeking a mortgage. Buyers should budget an additional $35oo plus recommends Winney.
• L- Lake - Generally the larger the lake, the better the return. “You can do more things on a larger lake,” Winney explains. Make sure there are no boating restrictions by checking with the lake’s association rules.
• O - Other - These can positively or negatively affect a property’s value. Some examples include: does the cottage back onto a highway; is it situated beside crown land; is it located in a busy part of the lake, is high boat traffic? Winney recommends visiting the property many times before you buy it; go when it’s busy i.e. on weekends and holidays. It’s important to do your research.
• T - Travel Time - Most people have a number in mind when they come to see her. People coming from Toronto are usually looking for something that’s 3 to 3 1/2 hours a way, while Ottawa folks want a 2 hour commute. Winney notes that people will add 1 1/4 to their travel time, if they find the perfect property.

After reviewing Winney’s list, I am relieved to discover I have not made a bad investment, while we do have to take a boat, actually a ferry to get to our cottage, the four hour commute passes quickly. I think people in the west are prepared to make a longer commute to get to water.

For prospective cottage buyers, Winney recommends working with a local agent. They often own cottages themselves and are very knowledgeable about the lake. They can take your emotive decision and make it a practical one.

Cheers,

Julie