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Tag: second home

  • What is porting a mortgage in Canada—and when should you do it? – MoneySense

    What is porting a mortgage in Canada—and when should you do it? – MoneySense

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    But picking a fixed mortgage rate can be problematic if you decide to sell your house and are forced to break your mortgage contract in the middle of your term. The penalties associated with breaking a fixed-rate mortgage can be very costly. 

    Thankfully, many mortgage lenders allow you to avoid penalties by porting your mortgage, which means carrying your existing term and interest rate to your new property. 

    So, how does porting a mortgage work, and when does it make sense? 

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    What is porting a mortgage? 

    Porting a mortgage refers to taking your current mortgage and transferring it to a new property when you move. Your existing mortgage rate and term are transferred along with your current mortgage balance. 

    To qualify for a mortgage port, you must follow certain rules. For example, you must sell your home and purchase a new one at roughly the same time—usually within 30 to 120 days, depending on the lender. Also, you can’t port more than your current mortgage amount. If you need additional funds to purchase your next home, the new money will be subject to current interest rates and added to the mortgage balance—but more on that later. 

    Most Canadian mortgage lenders offer portability as an option, but not all do. That’s why it’s important to find out if a prospective lender offers this feature before you take out a new mortgage. After all, you never know when your plans might change and you need to sell your home before your mortgage term ends.

    When does it make sense to port a mortgage?

    There are two main reasons you would want to port your mortgage instead of breaking your contract and starting fresh. The first is to keep your existing interest rate if it’s lower than current mortgage rates. The second is to avoid breaking your mortgage early and incurring a costly penalty. 

    “Porting is typically a good idea if your existing fixed mortgage rate is lower than current rates and you’re moving before your mortgage maturity date,” explains Lyle Johnson, a Winnipeg-based mortgage broker. “By keeping your existing mortgage, you avoid the prepayment penalties that would apply if you break your mortgage before its maturity date, while keeping your low fixed rate.” 

    What about a variable-rate mortgage? Most variable mortgages do not offer a portability feature. (Note, however, that you may have the option to convert to a fixed rate first, and then port.) If you decide to sell your house before your term expires, you’ll likely need to break your contract and obtain a new mortgage for the new property. That said, the penalty for breaking a variable mortgage is usually equal to three months’ interest on your outstanding balance, which is often less than a fixed-rate mortgage penalty. 

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    Colin Graves

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  • Is a vacation home a good investment? – MoneySense

    Is a vacation home a good investment? – MoneySense

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    Sometimes, emotions are the motivation for buying a vacation property. I like to evaluate a property purchase from a financial point of view as well—and here’s how. 

    The costs of buying a vacation property

    Say, a property’s purchase price is $500,000. Whether you use cash, a mortgage/home equity line of credit, or a combination of the two, there are other costs to consider.

    If you purchase with cash that you could otherwise invest for a 4.5% return (to use a conservative assumption), there is an opportunity cost of not investing that money or leaving it invested. If you borrow money, there may be an interest cost of 4.5%. So, to keep it simple, we will assume an opportunity cost or financing cost of 4.5%. 

    Property taxes, utilities, insurance, condo fees, and maintenance could easily add another 2% to 4% per year in costs. Those costs could be even higher for an older cottage or for a property with amenities and high fees, but we will assume 3% per year for discussion purposes.

    So far, our costs are up to 7.5% per year on a $500,000 property, which works out to $37,500 per year for our notional vacation property. 

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    Expected returns on vacation properties

    What about the financial return from owning the property? Canadian real estate prices have risen by about 6.3% per year for the 10 years, ending Dec. 31, 2023. Over the past 30 years, the increase is about 5.1%. Some cities have seen much higher growth rates, and others much lower. Prices have also cooled off significantly in the past couple of years. (Check out MoneySense’s guide on where to buy real estate in Canada.)

    Over the long run, in the U.S., real estate prices have risen just slightly more than inflation. In fact, since 1890, U.S. real estate has increased by less than 0.6% per year above the rate of inflation. Given the Bank of Canada’s 2% inflation target, despite a recent spike in the cost of living, I would argue a more reasonable long-term growth rate for real estate is 2% to 3%.

    So, we will assume the value of our notional $500,000 property grows at 3% per year; in the first year, that would be $15,000. That means the net cost in year one of owning the property is 7.5% (or $37,500) minus 3% (or $15,000), totalling 4.5% (or $22,500).

    Buying versus renting a vacation home 

    If you are contemplating a $500,000 vacation property purchase, and you think my assumptions are reasonable, you need to ask yourself: Are you going to get $22,500 worth of use out of the property? Could you rent a comparable property for less than $22,500 per year, for the time you plan to use it? If you could, a vacation property purchase may not be the best financial choice.

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    Jason Heath, CFP

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  • Best places to buy real estate in Halifax in 2024 – MoneySense

    Best places to buy real estate in Halifax in 2024 – MoneySense

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    Best places to buy real estate in Halifax

    In the table below, you’ll find the top Halifax neighbourhoods for real estate purchases. To view all the data, slide the columns right or left using your fingers or mouse. You can download the data to your device in Excel, CSV and PDF formats.

    Source: Zoocasa

    Top three neighbourhoods in Halifax

    For the second consecutive year, Cole Harbour is the top place to buy a home in HRM. Located east of Dartmouth, Cole Harbour is named after a local harbour. It has easy access to Highway 107 and Highway 111, making it an attractive location. Cole Harbour’s 2023 benchmark home price was $505,774, and that’s the result of consistent price growth in recent years. The benchmark price was 13% higher than in 2022, 66% higher than in 2020, and 69% higher than in 2018, giving Cole Harbour a value score of 4.0. It also has a neighbourhood economics score of 4.3, the third-highest in HRM. 

    The area has several schools—a convenience for the above-average 47% of households with kids. Residents love the area’s beaches and trails, including the Salt Marsh Trail and Rainbow Haven Beach Provincial Park. Cole Harbour is also a popular tourist destination: the quaint Cole Harbour Heritage Farm Museum and Fisherman’s Cove are two must-see stops. However, with the neighbourhood’s accessibility score of 0.6, you’ll likely need a car to get around.

    View Cole Harbour real estate listings on Zoocasa.

    Situated on the Eastern Shore of HRM near the Shearwater Canadian Air Force base, Woodside-Eastern Passage is a popular destination for military families due to its mid-sized community feel. Boasting a dozen eateries, convenient access to Halifax through the Woodside Ferry, the main Nova Scotia Community College campus and abundant character, this emerging neighbourhood proves to be a smart investment and a delightful place to live. Woodside-Eastern Passage’s benchmark home price was $432,486 in 2023, which was 18% higher than in 2022, 64% higher than in 2020, and 97% higher than in 2018. It’s the only neighbourhood in HRM with a perfect value score of 5.0. 

    The area features multiple recent subdivisions that provide a variety of housing options, including semi-detached and detached homes. There are many elementary, junior high and high schools that cater to the 45% of households with children. Like most places in HRM, you’ll likely need a car to live here, though.

    View Woodside-Eastern Passage real estate listings on Zoocasa.

    Located a mere 10 minutes from the airport and 30 minutes from downtown Halifax, the Waverly-Fall River-Beaver Bank area is renowned for its scenic landscape, featuring numerous lakes, expansive open spaces and generously sized lots. It also has the most expensive homes of the top three neighbourhoods on our list, with a 2023 benchmark price of $666,815. That was 8% higher than in 2022, 62% higher than in 2020, and 83% higher than in 2018. Notably, Waverly-Fall River-Beaver Bank has the second-highest economics score on our HRM neighbourhoods list.

    All homes in this area use septic systems; some rely on wells for water, while others are connected to city water. Residential lots are spacious and feature a range of traditional-style homes. Many residences boast lake access, and some even enjoy a lakefront setting. The neighbourhood has many sought-after schools. While the area may have limited amenities, it boasts a well-established canoe and kayak club, multiple daycare facilities, a post office and a convenience store. Living in Waverly-Fall River-Beaver Bank may necessitate owning a car, given its accessibility score of 0.1.

    View Waverly-Fall River-Beaver Bank real estate listings on Zoocasa.

    Unlike the ups and downs of 2022, Halifax real estate prices did not sharply increase or decrease in 2023. The benchmark price consistently rose from January through the end of the spring market and reached a late peak of $530,900 in August. Following this, home prices softened before experiencing a modest rise in December, settling at a benchmark price of $511,600. 

    “In the first quarter of 2023, prices and sales were up, but then the market really slowed down after the spring,” says local eXp real estate agent Richard Payne. (Zoocasa, the author of this study, is wholly owned by eXp World Holdings.) “Properties were lingering on the market longer, and we didn’t see multiple offers on a home anymore. By the second half of the year, buyers had shifted to a more cautious stance, preferring to wait on the fence to see how conditions would evolve.”

    As interest rates rose in the summer, buyers experienced some frustration, which morphed into confusion about what to expect from the market, says Payne. “Once buyers got confused, they didn’t feel confident to make any decisions, and this contributed to the slowdown in market activity.” 

    The uncertainty also influenced buyers’ budgets. “A lack of affordable options, especially in the $400,000 to $600,000 range, pushed many buyers to look out of the core and into more of the suburbs,” says Payne. “Homes in that range were getting more attention as interest rates rose.”

    Return to menu.

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    What’s next for real estate in Halifax?

    The benchmark home price in Halifax has increased by a little more than 1% since December, reaching $518,500 in January. With demand expected to rebound, price growth will likely continue, though that will depend on the mortgage rate outlook. 

    Payne expects the opposite of 2023 to unfold in 2024—with a quiet start to the real estate market, followed by an active second half. “In the beginning of 2023, activity was fairly up, and then as interest rate hikes were announced, it put the brakes on momentum,” he says. “This year, I anticipate a surge in activity in the second half of the year as buyers catch on to falling interest rates and rush back into the market.”

    Buyers who were sitting on the sidelines last year may be better positioned to join the market in 2024. An influx in buyer activity might also encourage more sellers to list their homes, leading to a much-needed bump in the number of homes on the market. 

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    Zoocasa

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  • Crackdown on Airbnb and other short-term rentals likely coming to unincorporated L.A. County

    Crackdown on Airbnb and other short-term rentals likely coming to unincorporated L.A. County

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    Airbnbs and other short-term rentals in unincorporated areas will be restricted to hosts who are renting out their primary residence, under a proposal that gained preliminary approval from the Los Angeles County Board of Supervisors on Tuesday.

    Officials say the rentals have proliferated across the county’s unincorporated areas, sometimes leaving a trail of raucous parties and trash-strewn streets.

    The proposed ordinance, five years in the making, would prohibit hosts from listing second homes, guesthouses, accessory dwelling units or investment properties in unincorporated L.A. County.

    The supervisors, who unanimously passed the ordinance on Tuesday, must vote on it one more time, likely early next month, before it becomes law.

    Under the proposed ordinance, hosts in unincorporated areas — home to roughly 1 million residents — would have to register with the county and pay an annual fee of $914. A property could be rented for no more than 30 consecutive days at a time. And so-called “corporate hosts,” who rent out multiple properties, would have to pull their listings.

    “It takes them right out of the game,” said Randy Renick, head of Better Neighbors LA, which pushes for regulations on short-term rentals.

    Better Neighbors LA says the ordinance would return desperately needed housing to the market. The group has estimated that there are more than 2,600 houses available for short-term rental in unincorporated county areas.

    The ordinance was supported by several tenant advocacy groups and public officials, who argued that short-term rentals were displacing long-term residents and replacing them with unruly tourists. Some residents have told news outlets that their street has been turned into a “de facto hotel.”

    “All around the County, residents must suddenly deal with commercial enterprises in the middle of their neighborhoods, bringing in rowdy parties, parking difficulties, high volumes of trash, loud noise, and guests that have no stake in safeguarding the community,” a coalition of city officials wrote in a joint letter.

    Some hosts — as well as the rental platforms they use — have opposed the proposed ordinance, arguing that it is an “attack” on mom-and-pop landlords, disincentivizes tourists from visiting and cuts off a much-needed income stream.

    At a county board meeting last month, Airbnb host Ellen Snortland said she felt she was being unfairly lumped with corporate landlords. She said she is in her 70s and uses Airbnb to stave off foreclosure.

    “Do you think people like us Airbnb hosts do it to get rich?” she said. “We do it for survival.”

    Vrbo, an online platform for vacation rentals, said it believes the county’s regulations would harm both tourists and the families that want to host them.

    The proposal “severely limits the options available to traveling families visiting the area and economic opportunity for residents who own, manage, and service these accommodations,” a spokesperson for the Expedia Group, which oversees Vrbo, wrote in a statement.

    The county’s crackdown comes more than five years after the city of Los Angeles passed its own short term rental restrictions, which barred Angelenos from renting out second homes on platforms such as Airbnb. The county’s version would bring unincorporated areas roughly in line with the city.

    Maria Patiño Gutierrez, director of policy with the tenant rights group Strategic Actions for a Just Economy, said residents will sometimes report illegal vacation rentals in their neighborhoods, only to discover that the homes are actually in unincorporated L.A. County and, therefore, completely legal.

    “The housing crisis is in all of L.A. County,” she said.

    Some supporters of the ordinance hope there will be one significant difference from L.A. city: enforcement with teeth.

    Researchers have found that hosts in L.A. regularly flout the city’s rules, with little consequence. A study from 2022 found that nearly half the short-term rentals in the city were illegal.

    Renick with Better Neighbors LA said he believes the county will do a better job of enforcement, though he said details on how that will be done are “thin.”

    “We’re confident, given what the various supervisors have told us, that the county’s going to take enforcement seriously,” he said.

    Nichole Alcaraz, operations chief with the county’s treasurer and tax collector, which spearheaded the ordinance, said they’re still hammering out the penalties for hosts that don’t comply. She said there will be more details in the coming month.

    “We do know there’s going to be an enforcement arm. We do have some general ideas about how that’s going to work,” she said. “But the amount [of the penalty] may change.”

    The ordinance would go into effect six months after the final vote and would include all property owners in unincorporated L.A. County with the exception of those along the coast. Residents in unincorporated coastal areas — including Marina del Rey, Catalina Island and the Santa Monica Mountains — will need to wait for the California Coastal Commission to consider the ordinance.

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    Rebecca Ellis

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  • How to use equity to buy a second home – MoneySense

    How to use equity to buy a second home – MoneySense

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    “Potential buyers may not have the cash they require to pay for an asset like a second home in part or in full,” says Maxine Crawford, a mortgage broker with Premiere Mortgage Centre in Toronto. “They may have their money tied up in investments that they cannot or do not want to cash in. By using home equity, however, a buyer can leverage an existing asset in order to purchase in part or in full another significant asset, such as a cottage.”  

    What is home equity?

    Home equity is the difference between the current value of your home and the balance on your mortgage. It refers to the portion of your home’s value that you actually own. 

    You can calculate the equity you have in your home by subtracting what you still owe on your mortgage from the property’s current market value. For example, if your home has an appraised value of $800,000 and you have $300,000 remaining on your mortgage, you have $500,000 in home equity. If you’ve already paid off your mortgage in full, then your home equity is equal to the current market value of the home. 

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    What is a home equity loan?

    A home equity loan (sometimes called a second mortgage) is when a home owner borrows money using the equity they’ve built up in their home as collateral for the new loan. Equity is the difference between the current market value of the property and the balance owing on the mortgage. Typically, home owners can borrow up to 80% of their property’s value, including any balance remaining on the first mortgage.

    How to use equity to buy a second home

    To buy a second property using home equity, you borrow money from a lender against the equity—meaning you use the equity as leverage or collateral. There are a variety of ways a home owner can do this.

    Mortgage refinance: When you refinance your mortgage, you replace your existing mortgage with a new one on different terms, either with your current lender or with a different one (when switching lenders, you may have to pay a prepayment fee, unless your mortgage was up for renewal). When refinancing, you can get a mortgage for up to 80% of your home’s value. Refinancing your mortgage allows you to access the capital needed to buy a second home.

    Home Equity Line of Credit (HELOC): A HELOC works like a traditional line of credit, except your home is used as collateral. You can access up to 65% of your home’s value. Interest rates on HELOCs tend to be higher than those on mortgages. However, you only withdraw money when you need it, and you only pay interest on the amount you withdraw, unlike with a second mortgage or reverse mortgage.

    Second mortgage: This is when you take out an additional loan on your property. Typically, you can access up to 80% of your home’s appraised value, minus the balance remaining on your first mortgage. Second mortgages can be harder to get, because if you default on your payments and your home is sold, the second mortgage provider only receives funds after the first mortgage lender has been repaid. To compensate for this added risk to the second lender, interest rates on second mortgages tend to be higher than for first mortgages.

    Reverse mortgage: Only available to home owners who are 55 or older, a reverse mortgage allows you to borrow up to 55% of your home’s equity, depending on your age and the property’s value. Interest rates may be higher than with a traditional mortgage, and the loan must be paid back if you move or die. You don’t need to make any regular payments on a reverse mortgage, but interest continues to accrue until the loan is repaid. 

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    Sandra MacGregor

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  • Second mortgages in Canada: What are the rules? – MoneySense

    Second mortgages in Canada: What are the rules? – MoneySense

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    • How you intend to use the property—i.e., for personal use (such as a second home or cottage) or as a rental or investment property. 
    • Whether or not the property will be owner-occupied—i.e., whether you will be living in the property (alone or with a tenant) or renting out all the units in the building. 

    If the second property is for personal use, such as a vacation property or cottage, you will likely have to meet the same down payment requirements as with your first home. For example, a second home purchased for $800,000 requires a down payment of 5% on the first $500,000, plus 10% on the portion above $500,000. 

    Rentals that are owner-occupied—maybe a home in which the owner lives on the main floor, and a tenant lives in the basement suite—generally are subject to the same rules, says Elan Weintraub, co-founder and mortgage broker with mortgageoutlet.ca. 

    However, if the property will not be occupied by the owner, meaning the entire property will be rented out, Weintraub says you should have a down payment of at least 20%, no matter the price of the home. He adds that certain lenders have different requirements.

    Lenders take the question of owner occupancy seriously, so always be honest about your plans, advises Weintraub. “If you say you will live in the property, then that’s the expectation, and depending on your lender and the mortgage type, you could be in default if you do not live there.” 

    Should you get a mortgage on a second property?

    Managing two mortgages is a big financial commitment, so it’s important to plan ahead and consider seeking expert advice if you’re unsure if you can afford it. 

    Weintraub says there are several key factors to consider before deciding to take on a second property mortgage. These include:

    • Your financial situation: Do you have extra savings in case, say, the roof collapses, the tenant stops paying rent, and so on? Buying a second property could be risky if you’re using your entire savings to make the purchase, leaving no room for unexpected expenses.
    • The time commitment: A second property (especially a cottage and/or rental property) could require a lot of maintenance and attention. Do you have the time to care for the property yourself, or extra money to pay for those services? If not, owning additional real estate may not be something you have time for. 
    • Your income stability: How secure is your job or your business? Are you certain you will have the income needed in the future to continue making payments on two mortgages? If you’re unsure about your ability to make payments in the future, you may not have the financial means of owning multiple properties.
    • Your time horizon: If you’re planning to sell the property in a few years, you may not recoup the costs of your initial investment. There are many upfront costs to account for when buying and selling real estate, including land transfer taxes, realtor fees and legal fees. 

    Second mortgage rates in Canada: What to expect

    Whether you go with the same lender or a different one for your second mortgage, the interest rate will likely be higher than for your first mortgage. That’s because your second mortgage takes second priority: If you foreclose on the home, the debt owed to your first lender must be repaid first. Therefore, your second mortgage provider takes on a greater risk and is compensated for this risk by charging you a higher mortgage rate.  

    Keep in mind that you’ll also have to pay the same administrative costs as with your first mortgage, including things like appraisal and legal fees. Furthermore, Weintraub emphasizes that cash flow should be another consideration. “You would need a strong income to acquire a second property, as you would have significant debt—a mortgage on your primary and secondary residence. A few years ago, rates were 1% to 3%, so it was much easier to borrow money. Today, the mortgage stress test essentially requires the mortgage to be tested at 8% or higher.”

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    Is a second mortgage worth it?

    Getting a mortgage on a second property can help you purchase the perfect cottage hideaway, support your adult children’s housing needs, or become a landlord for the first time. However, second property mortgages aren’t for everyone. Before committing to a second property, understand your financial position and consider speaking to a financial advisor or mortgage broker. 

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    Sandra MacGregor

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  • The tax implications of buying a second home in Canada – MoneySense

    The tax implications of buying a second home in Canada – MoneySense

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    Primary residences vs. secondary properties

    The tax treatment of real estate in Canada depends on its use. The home you live in—your primary residence—is normally exempt from capital gains tax upon sale due to the primary residence exemption.

    This exemption can even be used on vacation properties, so long as it is “ordinarily inhabited.” While the definition of “ordinarily inhabited” is vague, it means at a minimum you spent time living there during a calendar year. And while there’s an exception for years in which you move and own two homes, you can otherwise only declare one property as your primary residence at any given time. Generally speaking, you’ll want to apply the exemption to the property that has increased in value the most.

    Rental properties don’t qualify for this exemption under most circumstances. When they’re sold, if they have increased in value, capital gains taxes will normally apply.

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    Capital gains tax on a second property in Canada

    When selling a property, if you can’t use the primary residence exemption, then capital gains taxes will be levied against the increase in value. But capital gains are relatively tax-efficient, since only half of the gain is taxable—the other half you can stick in your jeans.

    To calculate the capital gain, you need to first calculate the adjusted cost base, or ACB, against which the sale proceeds will be measured. The starting point is the purchase price, and from there certain additions and deductions can be applied. Common additions include expenses incurred to purchase the property, like commissions and legal fees. Capital expenses, like those used to improve or upgrade the property, can also be added.

    Here’s where it gets a little complicated. Because a building is depreciable property which may wear out over time, investors can deduct a percentage of the property’s cost each year—known as “capital cost allowance,” or CCA. It can only be used against the building itself, not the land portion of the property. When the property is eventually disposed of, the undepreciated capital cost, or UCC—that is, the original cost minus the amount of CCA claimed—is recaptured and taxed as income, with additional proceeds being taxed as a capital gain.

    As a simplified example, say you bought a rental property for $1,000,000. Over the years, you deducted $200,000 of CCA. You then sold the property for $1,300,000. Here’s how it would be taxed:

    • Original cost: $1,000,000
    • CCA claimed: $200,000
    • Undepreciated capital cost: $800,000

    When the rental property is sold, that $200,000 CCA is recaptured and taxed as income. And since you sold it for $1,300,000, you have a capital gain of $300,000. Half of this is taxable, so you add $150,000 to your income that year. Between the recapture and the taxable half of the capital gain, you have $350,000 of income to report on your tax return.

    Capital expenses vs. current expenses: What’s the difference?

    In the above example, the cost of improving the property is a capital cost. It extends the useful life of the property or increases its value. Capital expenses can increase the ACB of the property and can be deducted over time via the CCA. Examples include:

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    Mark McGrath, CFP, CIM, CLU

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  • Down payment for a second home in Canada: How much do you need? – MoneySense

    Down payment for a second home in Canada: How much do you need? – MoneySense

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    So, how much of a down payment do you need for a second home? That depends on a few factors, including whether or not you intend to live at the property. 

    Down payment requirements in Canada

    Every Canadian home buyer is required to have a minimum down payment when purchasing property. A down payment is the money provided up front towards the purchase of the home, and it is directly tied to the value of the property. 

    When buying a home, the down payment rules in Canada are as follows:

    Purchase price Minimum down payment required
    $500,000 or less 5% of the purchase price
    $500,000 to $999,999 5% of the first $500,000 of the purchase price
    +
    10% of the portion of the purchase price above $500,000
    $1 million or more 20% of the purchase price

    If you’re buying a home priced under $1 million and your down payment is less than 20%, you’ll need to purchase mortgage default insurance, also known as mortgage loan insurance—which protects the lender if you can’t make your mortgage payments. Using a mortgage down payment calculator is the fastest and simplest way to figure out how much money you will need for your home down payment.

    Minimum down payment for a second home in Canada

    Contrary to popular belief, there’s no blanket 20% down payment requirement for second-home purchases in Canada. In fact, the down payment rules for a second home are similar to those listed above for single-property ownership, as long as the second home will be owner-occupied, meaning the owner will be living in it. 

    “You can purchase a second home with 5% down as long as the property is intended for family use throughout the year and the mortgage is under $500,000,” says Samantha Brookes, CEO of Toronto-based Mortgages of Canada. 

    The 5% down payment requirement applies to second homes with one or two units in them. For properties with three or four units, the minimum down payment jumps to 10%.

    Buildings with five or more units are considered commercial buildings, and they require a commercial mortgage. Depending on the property’s location and the buyer’s cash flow, lenders may require a buyer to have a down payment of 20% to 35% on commercial properties, according to Brookes. 

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    Sandra MacGregor

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  • Fractional Home Ownership—Smart Investment Or Real Estate Scam?

    Fractional Home Ownership—Smart Investment Or Real Estate Scam?

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    If you’ve been looking for a second home, vacation home, or pied a terre—you might have encountered an emerging trend called “fractional home ownership.” At an initial glance, it feels a bit like Timeshares 2.0—but it’s a different concept entirely.

    “Fractional home ownership is a real estate model where multiple individuals or entities collectively own and share ownership rights to a single property,” says Whitney Curry, Chief Marketing Officer of Pacaso, which is a marketplace offering co-ownerships in forty locations with everything from beach front property in Malibu to ski houses in Vail. “Instead of one family owning 100 percent of a vacation home that they will use just a few weeks each year, co-ownership enables people to right-size their ownership to align with what they’ll actually use.”

    But is this model a smart investment or something regrettable in the long term? Here’s what you need to know about this real estate trend.

    Not A Timeshare

    While fractional home ownership or co-ownership sounds similar to a timeshare because both models provide access to real estate for a specified amount of time annually—that’s essentially where the similarities stop. With fractional home ownership, the home is a real estate asset, whereas timeshares are not an asset. “[A timeshare is] a liability that gives the buyer the right to use time in a group of properties. Oftentimes, usage is fixed to a preselected set of dates. Timeshares are notoriously hard to sell, and often sell for a loss,” explains Curry.

    Unlike timeshares, fractional home ownership gives you access to a single property as opposed to a portfolio of properties. They’re also easier (but not necessarily easy) to sell than timeshares because they can be listed for resale on the MLS or Zillow at a price chosen by the seller.

    David Harris of Coldwell Banker Warburg tells me, “Unlike a timeshare, fractional homeownership properties follow the real estate market values and have the benefit of increasing property value as the overall market increases. So, if the fractional property you own increases in value during your ownership, you can sell for profit.”

    The Benefits Of Fractional Home Ownership

    While it’s not without risk, John Walkup, co-founder of real estate data analytics company UrbanDigs tells me there are numerous benefits of this ownership model. “Fractional ownership in real estate offers a mix of affordability and flexibility for individuals looking for a vacation home or pied-à-terre. On the upside, it is usually much cheaper than owning and maintaining a home outright, making it a more cost-effective choice for those unwilling to shoulder the entire financial burden of homeownership for a home they will not use on an extended basis.”

    Some fractional homeownership agreements allow owners to list their time on short-term marketplaces like VRBO or AirBnb. So, these properties can also produce income. It’s worth noting that Pacaso does not allow this.

    Another benefit is that the costs of renovation, furniture, and other essentials are split among the owners. This is a major part of Pacaso’s business model. All Pacaso homes are renovated, and feature premium furniture and even bespoke art from renowned artists including Elizabeth Sutton. “All Pacaso homes are sold fully furnished with professional, high-end, interior design. From the silverware in the kitchen and fully stocked pantry with abundant appliances to luxury linens and Instagram-worthy floaties in the pool, no detail is overlooked,” says Curry. “The homes are perfect from day one, for the first owners stay so owners can just show up and enjoy their time memory making with family and friends.”

    The company also manages the properties once all the shares are sold. So everything from booking time to cleaning, and additional maintenance issues such as the driveway plowed are taken care of. This can be very attractive to those who want a second home but want to be entirely hands-off when it comes to maintenance.

    Still, there are more risks involved with this investment model than sole ownership of a vacation home.

    The Downsides Of Fractional Home Ownership

    Broker Gerard Splendore of Coldwell Banker Warburg and his wife are co-owners of a property in Florida along with his sister-in-law and her husband. Both couples are on the deed as well as the mortgage and split maintenance costs equally. “We run this like a business, obtaining quotes for work and comparison shopping for appliances. To date, we have had to replace the dishwasher twice, the stove, the refrigerator, and the hot water heater. First, the air conditioning ductwork was replaced, then the central A/C. The lanai ceiling needed to be replaced, as did the garage door opener,” he says.

    While this particular arrangement works most of the time, conflict has arisen over visiting dates as well as whether or not to renovate the bathrooms.

    Another issue with fractional home ownership is that selling can be a challenge. “Selling a fractional interest can prove far more challenging than selling a wholly-owned property, mainly due to the smaller subset of buyers. It’s a niche market that only appeals to some people,” says Walkup.

    He also notes that financing can be tricky. “Banks can also be hesitant to lend against these properties, so cash buyers are preferred, narrowing down the buyer pool.”

    That being said, Pacaso is unique because it partners with banks allowing qualified buyers to finance up to 70 percent of the cost. Shares can also be purchased with crypto.

    Another problem is that much like short-term rentals, some cities are considering banning these arrangements, including Newport Beach, California.

    However, for someone looking for a vacation home that might be out of their reach otherwise and they’re willing to take a risk—fractional home ownership might be worth looking into.

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    Amanda Lauren, Contributor

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