Many Canadians dream of becoming snowbirds and exploring the southern U.S. “sunbelt” states, such as Arizona and Florida, in the winter. Some choose to buy vacation properties in those states, especially in light of the Canadian dollar’s continued strength against the U.S. dollar and lower U.S. house values.
Making real estate investments in the sunbelt can be a great personal decision. However, before you consider such a move, you should first make sure that buying a vacation property doesn’t leave your investments overweighted in real estate. What’s more, there are a number of other special risks and costs involved with buying and owning vacation property in the U.S.
5 risk factors to consider when making real estate investments in the sunbelt
Watch out for these unexpected costs. Some states, such as Florida, can charge out-of-state homeowners higher property taxes than state residents. As well, homeowners in coastal states that face frequent hurricanes and floods (including California and Florida), often face high insurance costs. That’s why it’s a good idea to contact national and state authorities, insurance firms and other professionals to get a clear picture of all the costs before making real estate investments in the U.S.
Take a skeptical view of bargains in U.S. real estate investments. House prices in certain U.S. markets have risen lately. In Los Angeles, for example, home prices have gained 22% in the past year. That may indicate that these markets are moving back to more normal levels in the wake of the sub-prime mortgage meltdown. However, they still face significant challenges, such as high unemployment and weak consumer confidence, so bargains in these states may not be as appealing as they seem. (Despite the price gains, California’s unemployment rate is the third highest in the U.S., after Nevada and Michigan.)
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How long do you plan to spend at your new home? You’ll have to budget for your home’s care while you’re not there, because vacant homes invite burglars and vandals. If you plan to spend shorter periods of time at your vacation residence (less than six months, say), and you’re not concerned about making a return on the sale of the property, you may consider renting, instead. This will help you decide whether you want to permanently commit to a community before you buy.
Remember that you’re buying a neighbourhood, not just a house. Owning real estate, especially vacation property, is much different than holding investments like stocks and mutual funds. It can involve unique risks, such as rising crime, unpleasant neighbours and other changes in the neighbourhood of your property.
These risks can make it hard to find buyers when you are ready to sell. So can unexpected physical problems, like nearby sinkholes, adverse traffic patterns, backed-up sewers and zoning changes that allow undesirable development, or limit what you can do with your property.
Before you buy, take a walk through the neighbourhood and take a skeptical look at the people you see. As well, try to get as much information as you can about such things as flight paths to nearby airports and planned construction in the area.
Another thing to consider is the quality of nearby schools, even if you don’t have children. Properties near good schools tend to have higher values, and attract a wider range of buyers when it’s time to sell.
Investment opinion: We continue to believe that ownership of a primary residence is all the real estate exposure that most investors need. What’s more, unlike your private residence, capital gains on the sale of your vacation property are not tax exempt.
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