It may seem tempting to use your RRSP to purchase a vacation home, but is it really the right thing to do? Find out why this financing strategy could cost you more than expected.
Jean-François asks me for an opinion.
“Every year we rent a small chalet in Estrie with a few friends that we like. At our last meeting we discussed the possibility of purchasing one of these chalets as a second property. Its value is around $240,000. It would be easy for us to raise this amount by drawing $60,000 each from our RRSPs. We couldn't have done the rental process every year, not to mention that the investment would have been profitable as the chalets are increasing in value these days. What do you think of our project?
Your purchase idea is excellent. However, you need to check the financing method.
RRP: not intended for buying a chalet
Before you move forward with purchasing your piece of paradise, it's important to understand a basic rule of RRSPs: These funds are intended for your retirement and cannot be used directly to purchase assets such as a vacation home. To touch them, you have to withdraw them, which inevitably entails significant tax consequences. This tax reality could turn a seemingly beneficial decision into an unexpected financial burden.
The worst thing you can do
If you cash out the RRSPs before retirement, you can make the purchase, but this scenario will be very expensive. Depending on your salary, you may have to pay 40 to 50% of the amount deducted in taxes. So each person's share is not $60,000, but between $100,000 and $120,000 of your RRSP funds if you want to purchase it without financing.
The right way
It would be advantageous to finance the purchase of the personal chalet by taking out a mortgage from a financial institution or better, if you are the owner, by taking out a mortgage loan against the value of your home.
The best option
Converting the purchase of a private chalet into a rental chalet can be a smart move for entrepreneurs with an entrepreneurial spirit. The chalet rental sector is indeed promising and investing in this area would not only allow you to enjoy the chalet during the desired periods but also earn an income from it by renting it for the rest of the time rent. You could rent the chalet to cover the costs and have a great time there without having to take a penny out of your pocket.
It's true that maintenance, repairs, management and rental can seem daunting, but there are specialist companies that can take care of all these aspects. Even if these are additional expenses, it should be noted that these costs are generally deductible from rental income, which can reduce the tax burden.
Considering renting your chalet as a property investment can also offer long-term prospects. By gradually expanding your real estate portfolio, you could open up a significant source of income. This is an option that deserves consideration and discussion with your potential partners in this adventure.
Diploma
The golden rule with RRSPs is to let them grow without cashing them out before retirement. In order to implement your plans to purchase a chalet, it is advisable to use other, more suitable financing methods. Because the time will come when you have to withdraw from the job market and retire. If you are at this stage of your life, you will be very happy to have sufficient financial resources to ensure your well-being. So RRSPs, unless there are very exceptional circumstances, we don't touch them!
Advice
1. Make sure your vacation home's zoning allows for short-term rentals.
2. Attend specialized chalet rental training to understand the intricacies of the market and legal obligations.
3. Inform your insurance company that you would like to rent out your chalet in order to benefit from appropriate insurance against possible damage.
4. Ask your accountant about the tax deductions that apply to renting a chalet.