question about purchasing a vacation property and only paying the interest

[cruiser]

I was talking to an acquaintance this weekend about his lake lot. He said that when he purchased his vacation property (a lake lot), all he did was qualify for the loan (he has good credit) and put it on a line of credit and then all he is doing is just paying the interest on the line of credit. He's not making any payments on the principle because his thought is....the interest is cheap (prime plus 1%)...hold onto the property for 10-20 years and then when it comes time to sell, he'll just pay off the line of credit at that time.

I didn't really say much, but thought that you had to have at least 25% down when buying a second property. If it was that easy (just to pay the interest), then everyone would buy properties and only make payments on the interest.

I'm not a banker, but thought that I would put this question to the crowd. Is it that easy to purchase a vacation property? The property in question was bought for $50,000 and is located in Alberta.

Cruiser

 

[cruiser]

It was a bare lot that he purchased (1/2 acre I beleive) and I'm sure that he would've secured it with his primary residence.

The point is....even with collateral, all a person has to do is just pay the interest???? (is that correct?)

 

[bcneil]

If you own a home, its pretty easy to borrow against the equity at prime or close to it.
You can use it to buy whatever you want, land, a second home.

And yeah you can just pay interest.

 

[2good4you]

That's not really correct. Technically he actually has 100% down. Basically, he's borrowing $50K from a line of credit from his bank (forget the property for a second), walking down the street to a realtor, and handing them $50K cash for this property. So, he's got 100% down which exceeds the 25% threshhold. It's different from a mortgage where the loan is actually secured against the property you're buying.

On another note, this isn't really a great idea either. Even though the interest he pays on the property would be tax deductible, it's only deductible against any rental income from the property (which I'm sure he doesn't have unless someone is paying him to pitch a tent on his property). So, he's paying roughly $1,625 in interest this year (assuming a 3.25% interest rate on his line of credit) which is likely to rise in the next few years. So, I'd guess after about 10 years he'll have paid roughly $20K in interest expenses or after 20 years about $40K-$45K.

Tough to imagine a chunk of land in Alberta would appreciate more than 40% (from $50K to $70K) in the next 10 years just to break even but to each speculator their own.

Hope that clears things up.

2good

It was a bare lot that he purchased (1/2 acre I beleive) and I'm sure that he would've secured it with his primary residence.

The point is....even with collateral, all a person has to do is just pay the interest???? (is that correct?)

 

[sunnysideup]

It can be done but I'll bet his line of credit is secured on other property that he owns. He should recognize that when he sells it he'll have to pay Capital Gains Tax if it's gone up in value.

 

[tyronejames]

The location of this lot would make a big difference in this plan of speculation. Without knowing that, on average, I'd say this chump might as well go play online poker. Or better yet I can sell him foreign exchange signals. . ..... If he really was some gee whiz bag wizard it wouldn't take him 10-20 years to earn a decent return.

 

[ReluctantPooner]

Unless this guy looks at the interest payment as the cost of having his very own place to pitch a tent?

 

[FunSugarDaddy]

You should be aware that both the interest expense and the property taxes would have to be capitalized and these expenses not can't be claimed annually, rather they have to be added to the cost base when sold to determine what the profit or loss is.

It was a bare lot that he purchased (1/2 acre I beleive) and I'm sure that he would've secured it with his primary residence.

The point is....even with collateral, all a person has to do is just pay the interest???? (is that correct?)

 

[wilde]

You should be aware that both the interest expense and the property taxes would have to be capitalized and these expenses not can't be claimed annually, rather they have to be added to the cost base when sold to determine what the profit or loss is.

You can claim these expenses to the extent of the net rental income, if any, derived from this property.

 

[FunSugarDaddy]

True, but it has to be available for use, and raw land that's earmarked for a vacation property is on the face of it, a long way from meeting that criteria, especially as the intention appears to be to hang onto it until it appreciates and then sell it.

So if it's just a piece of land that's being held for appreciation purposes, I doubt there'd be any rental income being derived from it.

That said, if there is, then yes, these expenses can be claimed going forward, once that threshold has been met.

You can claim these expenses to the extent of the net rental income, if any, derived from this property.

 

[wilde]

True, but it has to be available for use, and raw land that's earmarked for a vacation property is on the face of it, a long way from "being available for use."

It could be coincedental farming (growing weed) income, I suppose, LOL.

 

[FunSugarDaddy]

It could be coincedental farming (growing weed) income, I suppose, LOL.

Ya, like anyone's going to want to claim that income. Even if they wanted to, they'd probably smoke enough of their own product to forget about filing their taxes period, never mind claiming anything...lol

 

[cruiser]

You can claim these expenses to the extent of the net rental income, if any, derived from this property.

The person in question purchased the "vacation lot" and then put a recreational trailer (23 ft) on it along with a few outbuildings, etc. He's NOT renting it to anybody, but rather uses it for his own enjoyment.

The one point about paying interest for 20-25 years and then still having to pay the principle is true. There's no guarantee that when you want to go sell it, that the market will be hot. (I can say that in the time that he's owed it, it has gone up over 50%).....but the lake lots in question have problems of vandalism/B&E from the locals. Some of his neighbours are trying to sell, but not to many bites.

The land in question is 2hr NE of Edmonton.

 

[wilde]

The person in question purchased the "vacation lot" and then put a recreational trailer (23 ft) on it along with a few outbuildings, etc. He's NOT renting it to anybody, but rather uses it for his own enjoyment.

Just for argument sake, there are plenty of people who rent out their "VACATION PROPERTY". You did not specify whether your acquaintance is renting it out or not in your op so I'm free to make assumptions.