Can cottages be part of a wealth-building strategy?

Cottages in this industry are most often discussed in the language of a headache. Those headaches could be around the inheritance of a family cottage that the heirs don’t agree on a plan for, or its monthly tax and maintenance bills, or the potential capital gains tax implications for the sale of a cottage property. The decision to purchase a cottage property is more often driven by a love of nature, a need to escape, and its intangible value beyond financial worth. Cottages often sound more like a detractor from — rather than a contributor to — a wealth building strategy.

That may not always be the case. While the snarls, issues, and risks related to cottage properties are significant, there may be situations where the right property can serve a client’s financial plan. Through assessment of property type, a client’s goals, and the potential risks and rewards — both financial and emotional — that come from a property, advisors may be able to help a client turn a cottage into a positive contributor to their financial plan.

“Canadian families love their cottages, many of my clients have these generational cottages, and I think owning a cottage definitely can be a wealth building idea, but you should be using it and enjoying it as a vacation property first and foremost,” says Tina Tehranchian, Senior Wealth Advisor with Assante Capital Management Ltd. “Using it as an investment property and renting it out is a different story, but usually for cottages there’s a core element of enjoyment, of a family building memories. In the meantime, though, many cottages have appreciated significantly over decades.”

The appreciation of cottage properties can serve as a double-edged sword for the wealth of many Canadian families. For one, the run up in this market has left families with a potential windfall in the form of appreciation. On the other hand, the new higher capital gains inclusion rate and the fact that cottages don’t qualify under a primary residence exemption mean that the family may face a much higher tax bill than they anticipated.

This becomes all the more challenging when a cottage property is passed from one generation to the next. That inheritor generation may not be fully aligned on plans for that property, and they might not expect the tax bill that comes with inheriting it. Tehranchian suggests using testamentary trusts or co-ownership arrangements to help a family pass on the property more seamlessly, while understanding the costs associated with ownership.

But what about families who don’t currently own a cottage and want to buy somewhere? Adam Jacobson, principal at RAM Development Group, explained some of the market dynamics in the Ontario cottage market. Namely, he highlighted the importance of quality lake access and proximity to a major city like Toronto as key growth drivers.

“The one area of cottage market that it has always been really sought after is lakefront property, and there's only a certain number of lakes that I would say are accessible to Toronto,” Jacobson says. “Not a lot of people want to drive seven hours to go to a cottage. They want to kind of be in that two-to-three-hour range. Even when you're getting up to three hours you start to see the cost of those cottages come down.”

Jacobson notes that his company is now developing a set of cottage properties south of Gravenhurst, On. in an area roughly 1.5hrs drive from Toronto. He highlighted other aspects of the development which he believes to be value additions, such as a promise of “maintenance free” cottage ownership.

Even if the property seems convenient and comes with amenities, Tehranchian always tells her clients to try renting a cottage first. Just as she would suggest any prospective snowbird try spending the winter in Florida at a rental first, she suggests that clients spend long periods in the summer at a rented cottage. This would give them a better sense of the lifestyle involved and whether that fits for them. The value of the asset, she emphasizes, is always secondary to its use as a place of enjoyment. If the family doesn’t enjoy a cottage lifestyle, then it’s a non-starter.

If clients want that lifestyle, Tehranchian says it’s on their advisors to run scenario analyses and see how this purchase might impact their retirement plans. That would factor in any assumptions about the growth of the cottage, property taxes, and maintenance costs. It would also involve a fulsome discussion of any estate planning implications that come with owning one of these properties.

“As an advisor, you have to help your clients make a smart decision, and that means probing and finding out their reasons for wanting to make this purchase,” Tehranchian says. “Then seeing how that is going to impact their overall planning, whether It's their lifestyle right now, or the affordability of their retirement. So that is, I think, the biggest value added that a financial advisor can bring to the table for a client who's thinking about purchasing their cottage.”

Opinions expressed in this article are those of the author only and do not necessarily reflect those of Assante Capital Management Ltd.