Topic: How To Invest

A second home in the U.S.—good investment idea or not

The summer of 2019 seems to have stretched way into October for parts of Canada, but we all know how long winter lasts, and many Canadians spend part or all of that harsh winter in Florida or other southern locales. Despite rising home prices in key U.S. markets, many of us are buying second homes with the belief that even further price increases are inevitable and will make those winter havens good investments.

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.


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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 this may make it a good lifestyle choice. But 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.”

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.

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. You will need the real estate market to go up by 5% or more every year, just to break even.

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. 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, and a bad place for any significant portion of your retirement savings.

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.

Comments

  • Normand J.

    I would kind of agree with you that Florida might not be the best place to buy if you wish to use it in the peak of winter. But there is other places in the US where the situation present itself in a much better investment opportunity then Florida. Look at Myrtle Beach, the Mecca of golfing, we recently bought a condo for one third the price of the 2006/2007 peak, the summer rental income in Myrtle (best summer rental in the US) covers the annual ownership costs. Longer term 5 to 10 years market should have corrected. As you probably know the second home market has ten year cycle in the US. We have seen it before in the nineties. As golfer, for me the best time to golf in Myrtle is April, May and September. Good luck to interested investors.

  • Willy C.

    As I read this comment I am in a rented condo in St Pete’s Beach, FL. Thought about purchasing a place, but just doesn’t make sense. Invest what you would spend to buy a place in an income producing investment and use the proceeds for renting a place. Besides when you get tired of a particular locale, it is easier to switch.

  • Cliff H.

    Consideration to purchase a second home in the US, whether for lifestyle or profit, should include the impact of U.S. taxation on Canadians. A U.S. tax return reporting worldwide income as well as other returns must be filed by “U.S. Persons”, who include those that have a “substantial presence” in the U.S., i.e. physically present 31 days in the current year and also present 183 days that include all the days present in the current year plus 1/3 of the days in the previous year plus 1/6 of the days present two years ago. There are implications for Canadian “U.S. Persons” with RRSPs, RRIFs, RESPs, TSFAs and financial accounts of $10,000+ outside the U.S. A U.S. Person can be subject to U.S. income and capital gains tax. A “Non-resident Alien” may be exposed to U.S. estate tax on worldwide assets, particularly with the expected reduction of the current $5.12 million threshold. Even if no tax is payable, fines for failure to file required forms can start at $10,000, or $100,00 for willful violations. This whole area is further complicated by state taxes, withholding taxes, amnesty programs, and relief and planning options. We should also be aware that with the current U.S. border security systems and Canadian bank reporting requirements to the U.S., Uncle Sam knows much about all of us who cross the border and is in position to detain.

  • I agree lifestyle choice.I purchased spring 2010 after renting 6 years various places.Now finally feel at home.
    Not sorry at all dont expect to make any money but operating costs less than former rentals and 1% at bank not very profitable after taxes.Also not necessary to get upset over possible us tax consequences do due diligence and make your reports as required.

  • Eric P.

    Yes Pat, good advice and well written. We wintered for 17 years in Florida. Started with a Mobile Home but then went to a more permanent condominium Bungalow dwelling. Lost $10,000.00 when we sold the Mobile home. Found out the hardway that you don’t make money on realestate in Florida. In our Park many just walked away after failing to sell. Also if it is a Rental type Park where you own the home but your space is rented, it is controlled by Investors who raise the rent every year and it is not the Cost-of- Living raise. Our Park was Owner by Investors from Detroit. Remember Florida and hurricains. Hundreds of Mobile Homes have disappeared during wind storms. I am a handyman and was amazed when doing some renovations how flimsy the wall construction was, especially in the older Mobile homes. No 2×4 walls. Our second Florida home was more pernament and in a lovely well run Retirement Community. Solid concrete walls, attached to another similar home, 2 car garage, 3 Golf Courses, Swimming Pools, Large Auditorium where shows from New York came every so often to entertain. Lots of activity, dances, clubs of all sorts, craft clubs, choirs, anything you could wish for to be happy. It was nice when we arrived in late October to come to our own place with our furniture etc. We had to pay for someone to check the place through the summer every week. There was Condo fees, realestate taxes. Americans are great entertainers with house parties, very friendly, always having get-to-gethers and never treated us as foreigners which we were. We sold when I reached 80 and Health Insurance became very expensive, even though we were both healthy. When we sold, fortunately the American Dollar was high and the Canadian Dollars low and when it was all added up we broken even. The Condo Fees, Taxes paid, Insurance etc. was lost but we consider those dollars vacation money we would of had to pay had we had that accommodation. Didn’t gain a penny but had some wonderful winters. After we had Sold and with the Housing collapse in 2008 the Corporation that managed everything for financial reasons, offered the residents the complex which the residents bought. It was in the millions of dollars. Anyone thinking of buy should be aware of that possibily. That’s our Florida story and we would do it again even though it was costly.

  • I agree with your estimation of potential difficulties with the real estate market and with the second poster’s comment about getting tired of being at the same vacation place all the time. Makes sense for some folks but that was your main point–possibly a good lifestyle choice but not an investment choice. Several friends of ours have bought properties in Arizona but they like going to the same place all the time (for four or five weeks out of 52). Not a good choice for us. Thanks very much for your comments (of course it helps that we agree….).

  • Best to take some time down there and contemplate all the costs, property taxes will be going up for years not to mention condo fees insurance etc…

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