Despite high interest rates, many of us are buying second homes in sunshine U.S. markets thinking further price increases are inevitable and will rival the returns on quality U.S. stocks.
A while back I was interviewed about this trend on CTV. Apparently I surprised everybody when I said that buying in Florida might make sense as a lifestyle decision but was liable to be a bad investment.
Here are a couple of the “buts” they raised, and my responses.
Regardless of the pace of property value appreciation, “you’ll have use of your vacation home whenever you want.”
That’s right, and even a top-quality U.S. stock doesn’t offer that. While this may make a second-home purchase a good lifestyle choice, note that there are always plenty of Florida rentals to choose from if you aren’t tied down to going to the same place on every visit. It’s much cheaper to rent for a month or two than to pay a full year’s cost of ownership.
“But you can rent the place out to generate income.” Try doing that with by holding quality U.S. stocks
That’s true. But most renters want to rent the place in the same periods when you want to be there. You’ll get low rent, if any, the rest of the year. Then too, expectations of nice weather supply a lot of Florida’s appeal, but weather varies. A couple of cool winters could hurt rental and buyer demand for your property. So could a hurricane or two. Meanwhile, costs accumulate.
[ofie_ad]
Investing in real estate: You’ll need help from the real estate market to realize a profit
Costs may be higher than you think. Beyond the purchase price, you’ll also have to pay real estate taxes and condo fees, if that’s your choice of a dwelling.
On top of that, there’s insurance and maintenance. In addition, due to the heat and humidity, you have to run the air conditioning year-round to avoid mould. By the time the housing market stabilizes, new condos will come up for sale and compete against decades-old units. Let’s say when you sell, you pay a 5% real estate commission.
If you make any money on the sale, you’ll be liable for capital gains taxes, unlike the tax-free capital gains you can earn on your Canadian home.
You can still find attractive investment opportunities in Florida’s real estate market, but not in the kind of properties that most Canadian buyers are seeking. If you’re investing in real estate primarily for profit, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land. Investments like these can give you current income, plus long-term development possibilities, much like a quality U.S. stock can. That’s a potent combination for patient investors.
Buying a second home in the U.S. Sunbelt may be a good personal lifestyle choice. But it’s a risky investment, compared to, say, quality U.S. stocks. It’s also a bad place for any significant portion of your retirement savings.
What are the legal considerations for owning property in Florida?
Florida has favorable homestead exemption laws for primary residents, but as a Canadian non-resident owner, you’ll face higher property taxes, potential exposure to lawsuits without homestead protection, must complete FIRPTA tax withholding when selling, and should establish proper estate planning to address both countries’ inheritance laws.
What are the costs associated with maintaining a second home in the U.S.?
Costs of maintaining a U.S. second home include property taxes, homeowners insurance (higher in hurricane-prone areas), HOA fees, property management fees (typically 8-12% of rental income), utilities, regular maintenance, and potentially higher expenses for repairs due to extreme weather events.
How do Florida property taxes compare to those in Canada?
Florida property taxes average around 0.98% of assessed value (with non-homestead properties paying more), generally lower than Canada’s average rates of 1.2%, though Florida lacks provincial income tax which is why their property taxes fund more local services.
How will U.S. rental income be taxed, both in the U.S. and in Canada?
U.S. rental income is subject to a 30% withholding tax in the U.S. (reducible to 0% with proper filing of Form 1040NR), while in Canada you must report this income on your Canadian tax return but can claim foreign tax credits for U.S. taxes paid.
If you have bought, or considered buying, a second house in the U.S., were you motivated by the expectation of profit or simply a lifestyle choice? What would you say to others pondering the same sort of purchase?
Note: This article was initially published in 2012 and is regularly updated.
