Is Buying A Second Home For Investment Profitable in Canada

Are you thinking of buying a second home in Canada? If you are concerned about the market trends and the Return On Investment from a second home, this article can help you in making an informed decision.

Buying a second house is a growing trend for Canadians, especially millennials. The work and lifestyle changes during the pandemic, combined with low interest rates have fuelled up the real estate demands in Canada. According to a report by the Financial Post, despite a pandemic, the average price of a house across Canada continues to rise.

However, there are many things to consider before buying a second home. The property location, size, finance options, and lifestyle are going to impact your second home’s profitability in the real estate market.

While we explain if a second home for investment is a good idea or not, check this URL to learn how to buy a second property in Canada.

Here are the pros and cons of buying a second home for investment in Canada:

Tax benefits

Many people who own a second property choose to leave it idle when not using it as a second home. If you collect rent for no more than two weeks per year, mortgage interest and property taxes will be fully deducted from your income.

Rental Income

Rental income is one of the most popular sources of permanent passive income. If you own a second home, you can have a stable income for a long time in the future. If your property is located in a tourist destination that attracts high rents, you can also make money from the demand for vacation rentals.

Equity Building

When your tenant pays for your mortgage, you can build sustainable wealth by owning a second home. As your mortgage decreases, your net worth will increase. And with multiple homes, you can quickly build your net worth in a short period.

Risk mitigation

Real estate investments are low-risk investments. And a better way to diversify the risk further is by investing in multiple properties. By buying houses in different markets, you can minimize the impact of the housing market crisis.

Real estate growth income

Over time, your property will increase in value, so you can accumulate capital and increase wealth faster. In the future, you can sell your property at a higher price to pay for your retirement. In cities like Toronto and Vancouver, increased demand for real estate property has been pulling up prices.

However, the value of real estates like stocks, bonds and other investments has been fluctuating and may continue to fluctuate in the future. So please keep in mind that there is no guarantee that the second will attract a higher sale price in the future.

Moreover, buying a second home isn’t that easy. It is one of the major investments that you make. When you buy more than one property, you pull up your stakes, responsibilities, liabilities, and risks.

Here is why investing in a second home may not be a good idea:

Down Payment

One of the biggest challenges of owning a second home is the down payment. You may need to pay 20% of the value of the second property out of your pocket. And also continue to pay for the mortgage on the first home.

High-cost mortgages

The Canadian real estate lenders have had bad experiences in the recent past; hence may be conservative on mortgaging new purchases. Depending on the location, condition, market value of your property, and your credit history, you may have to pay up to 30% down payment on a mortgage of 15 to 30 years. The mortgage costs can move further up for vacation properties.

High closing costs

Every time you buy or sell a house, you must pay registration fees, attorney fees, mortgage fees, insurance fees, and other closing costs before you take over the property.

Maintenance costs

Managing multiple houses is complicated and expensive. You incur significant maintenance costs on both of them. Also, a vacant home becomes a liability rather than an asset. As the homeowner, you either hire a property manager or maintain yourself, which can be very demanding and tedious.

Unsecured rental income

The rental income of your second home depends on several factors. Your property may be in a neighbourhood that tenants do not like; therefore, it can be difficult for you to rent it out and may have to leave it vacant for a long time. Each vacant day will increase the investment losses incurred on your property and take away your mental peace.

Tenant management

Unfriendly tenants and their tantrums can be a bad experience. Some renters do not pay rent on time, and you may have to pay for maintenance, insurance, taxes, mortgages, and other expenses. Many times tenants don’t evict the property on time and create unpleasant scenarios for the landlord.

No liquidity

You lock your liquidity by investing in real estate. While building an asset, you lose immediate access to the capital you lock in it; and the ability to sell and liquidate the property quickly in case of an emergency.

Should you invest in a second home in Canada?

If you are financially sound, want to diversify your income sources, and don’t mind paying for a good real estate agent, buying a second home in Canada may be a profitable idea and a safe investment. Make sure to research the real estate market, analyze your budget and cash outflows, consider all the closing costs and your lifestyle needs before making a purchase decision.

It is best to consult an experienced and professional realtor to help you find the best property in a good location within your budget and expectations.

However, if you are not ready to face the risks and financial implications, liquidity issues, and challenges that we have mentioned in the pros and cons of buying a second home; you should reconsider an investment idea in the Canadian real estate market.