So you’ve set a goal, establishing the day when you will officially retire from farming. You plan on being around for many more years after that, but when you do shake off this mortal coil, what will you leave your children?
You always thought it would be the farm or at least part of it. Now, you’re not so sure.
They’re all established in their careers and their lives. It doesn’t look like any of them want to get into farming. Maybe you’re wondering if you should sell the farm and invest in a vacation property. You could enjoy the heck out of that condo/beach property/snowbird nest and eventually leave it to the kids.
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A few years ago, with U.S. housing prices plummeting, we knew that investing in property there was probably a good idea. But even now, according to the National Association of Realtors in the United States, there are good deals to be had. While home prices south of the border are slowly climbing to pre-crash levels, vacation homes are still 20 to 40 percent lower than they were five years ago.
Condos top the list for U.S. property purchases by Canadian investors. When the days get short and Canadian cold descends, off you go to your Florida or Arizona home. You don’t have a yard or property to maintain, condos are cheaper than a single-family home and they’re often easier to rent short or long term.
But there are other factors to consider if you’re also looking at that condo or house as an investment property that you will someday pass on to your kids. In an August, 2015, article by Romona King on MoneySense,.ca, D.G. Southen, a real estate investor from London, Ont., says that an investment requires an objective analysis of a property along with research on the local market and an accurate assessment of costs.
The standard home inspection will cost up to $1,000, but Canadians may need to be reminded to also purchase a separate termite inspection in warmer states such as Florida or Arizona. This will cost around $1,000 and the American Association of f Professional In-spectors recommends termite inspections every two years.
If you mortgage the home, budget one to two percent of your mortgage amount, not the purchase price, for title search and insurance.
Ongoing expenses include condo fees, property insurance and property taxes, which can range from .5 percent in Arizona and California up to two percent in Florida.
Also, some states charge extra non-resident taxes. For example, Florida charges foreign property owners twice as much tax as that paid by state residents, and these rates can rise, sometimes quickly, with no cap.
You will likely want to hire a property manager to look after the property and arrange rentals when you are not there. A property manager will typically charge eight to 12 percent of the monthly rental value.
When you choose a realtor, consider one with experience working with Canadian buyers. Keeping in mind your goal of finding a home that can be easily rented in the off-season, think about what potential renters are looking for.
Proximity to a larger city will be a drawing card, while a lower priced home in a remote location will probably not attract as many tenants. The old real estate cliché, “location, location, location,” rings true. The closer to the beach, the higher the rent.
On the plus side, there will be no prepayment penalty on the mortgage. With the Canadian dollar hovering around US75 cents, Canadians buying property in the U.S. might consider borrowing in the U.S. with a U.S. bank such as the U.S. arm of the Royal Bank of Canada.
Using this strategy, they can avoid having to convert the full amount of the loan. They will only have to make the monthly payments in U.S. dollars, converting the money in relatively small amounts.
Edie Wilcox grew up on a half section farm near Okla, Sask. She and her sister eventually inherited the farm. With a chuckle, she says she always wanted vacation property but it wasn’t an option and it wouldn’t have been practical for her, either.
She felt the farmland would hold or increase its value, while vacation property, which also would have to be maintained, might not.
“I guess the value of vacation property goes up, too, but I think it is more susceptible to the economy than farmland,” she says.
There are two ways to make money on farmland: capital appreciation and income. In 2016, land prices across Western Canada continued to rise. Even if a farm did not return one penny, just owning it was a solid investment.
Two farms sold recently on CaFarmland.com website: one near Nipawin in northeastern Sask-atchewan and the other near Moose Jaw in south-central Sask-atchewan. These farms returned to the sitting tenants in land lease six and 5.85 percent, respectively, which is considerably more than what would be realized with almost any investment in these economic times. Risk factors would be weather and crop failure.
At the same time, a vacation property may also be increasing in value, but as Wilcox pointed out, not being considered a necessity, vacation property values are more vulnerable to the ups and downs of the economy.
Vacation home rental income is also subject to various risk factors, the main one being the fact that the time when the property would be most in demand by potential renters, such as winter, would be exactly the time the owners would want to be in it.
