Cottage vs investing the money: an honest comparison

“Is a cottage a good investment?” is one of the questions buyers ask. Our honest answer: it can be, but that is not the best reason to buy one. Here is how to compare a cottage with investing the same money, without the hype on either side.

The math most people skip

Comparing a cottage’s sale price to its purchase price makes it look like a great investment almost every time. That leaves out most of the cost. A fair comparison counts:

• The down payment and closing costs, including Ontario land transfer tax.
• Mortgage interest over the years you own it.
• Every year of property tax, insurance, utilities, repairs and upkeep.
• Selling costs at the end.
• Tax on the gain when you sell or pass it on.

On the other side, the invested money also has costs and taxes, and its value goes up and down too. Our calculator lets you set both sides with your own numbers.

Cottage prices do not only go up

Use recent completed sales of comparable properties on the same lake or nearby competing lakes. Match road access, waterfront quality, lot size, condition and permitted use. Provincial reports and asking prices cannot establish what one cottage is worth.

A mortgage magnifies gains and losses

Most people buy a cottage with a mortgage. Borrowing means a price rise grows your equity faster than the price itself. It also means a price drop hits your equity harder, and you keep paying interest either way. Stress-test your plan with the affordability calculator at today’s qualifying rate, not just today’s contract rate.

Carrying costs are the drag

Property tax, insurance, utilities and repairs continue even when you are away. Use actual quotes and bills, with a separate repair reserve, in the annual ownership budget.

Taxes on each side

If the cottage is not your principal residence for every year you own it, part of the gain is taxable when you sell or at death. The capital gains inclusion rate is 50%, under the current CRA guidance. Investments held in registered accounts like a TFSA or RRSP get their own tax treatment, and non-registered investments are taxed as you earn and sell. Read cottage principal residence designation and talk to your accountant.

Talk to Jeff and Emily

Want to see a cottage purchase and an investing plan side by side with your real numbers? Book a call and we will walk through it together.

Or call or text 416-628-9682

Book a call

When rental income changes the answer

Renting some weeks can offset carrying costs. But licences, cleaning, management, insurance, HST on short stays and income tax all reduce the net, and many townships now limit rentals. Rental also changes how lenders and insurers treat the property. Test it in the rental income calculator before it goes into your comparison.

How to run the comparison

1. Enter the cottage price, your down payment and the mortgage rate you have been quoted.
2. Add a realistic yearly carrying cost from the cost of owning calculator. Leave rental income out for the first run.
3. Pick a modest yearly change in cottage value, and run it again at zero and at a small decline.
4. Set the investing side to a return you would be comfortable planning around, and run a lower one too.
5. Compare the ranges, not one answer. If the cottage only wins in the best case, that tells you something.

Run the numbers at the qualifying rate as well as your contract rate, so a renewal at a higher rate does not change the answer. If the numbers are close, that is normal for a cottage and makes the family-use question more important.

The return you cannot put in a spreadsheet

Most of cottage buyers buy for the time at the lake with family, and that is a perfectly good reason. If the money comparison comes out roughly even, how often you will actually be there usually decides it.

A simple way to decide

1. Can you carry the full yearly cost comfortably without rental income?
2. Would you still be happy if the cottage was worth the same in 10 years?
3. Will you use it enough? Count real weekends, not hopeful ones.
4. Does it still leave room for retirement savings and an emergency fund?

If you answered yes to all four, buying is probably a good decision for you, whatever the markets do. If not, renting a cottage for a few summers or buying with family can be smart steps. Start with should I buy a cottage or reach us at get started.