You’re Nuts To Buy a Vacation Home

For many Canadians, the dream goes a little something like this.Cottage-lake

On Friday afternoon, after dealing with Carl from accounting for approximately the 400th time, it’s finally quittin’ time. You elbow past everyone else to the lobby, desperate to get the stink of work off you. After exchanging pleasantries with your fellow wage slaves, you’re in the car and off to the races.

First stop, home. Just enough time to pick up the wife and kids before you’re back on the road again. Destination? Cottage country. Sure, it’s a couple of hours away, but you just can’t wait to get away from the bumper-to-bumper traffic, the urban sprawl, and everything else that annoys you about day-to-day life.

Finally, you’ve arrived to your home away from home. Everything is still set up after last week, all you need to do is hit the store for a gallon of milk and maybe some hot dog buns. The rest of the weekend is spent sitting around the fireplace, roasting marshmallows and probably drinking too much wine.

Ah, now that’s the life.

I won’t knock the experience of going up to the lake for the weekend. I’m not much of a nature guy (“man conquered nature, why would you willingly go back” is my slogan), but I have to admit sitting by a serene lake is pretty great, assuming the mosquitoes are kept at bay.

But there’s a huge difference between wanting to go hang out at the lake and buying property up there. Buying a cabin just isn’t a good idea.

There are a couple of reasons. First of all, cabins cost a lot of money for something that just gets used a few months of the year. Look at it this way. If you buy a cabin worth $250,000 and it takes 20 years to pay back at a 4% interest rate, you’ve spent more than $362,500 just to buy the thing, and that’s not even including property taxes, insurance, and general upkeep.

Besides, most people are just too busy to properly enjoy a cabin. For each family that actually spends each summer weekend at the cabin, there are probably five more that wistfully yearn for more time away, but just can’t seem to find the time. For that family, renting a cabin for the few weekends a year they can get away is a much better choice.

Let’s assume it costs $1000 to rent a cabin for a weekend during the summer months. Our busy family makes it out for three weekends per year. The amount they pay in rent won’t even cover the property taxes and upkeep, leaving them to save thousands in interest over the life of a mortgage. It seems like renting is a much better choice.

But wait, you say, the analysis is missing a very important point. Over the last 20 years, most cabins have been a terrific investment, tracking the price of Canadian real estate in general, which has practically been on an uninterrupted path skyward. Surely cottage owners have made more than enough in capital appreciation to make up for the interest paid.

And you’d be right. On average, Canadian real estate has increased approximately 5% annually over the past two decades. But will that growth continue? And how does it look compared to the alternatives?

Let’s assume two folks took radically different paths. The first one bought a cottage in 1994 for $250,000, paying 4% interest for 20 years. This investment has gone up 5% a year. Today, it would be worth $663,000, less $112,500 in interest. Let’s call it $550,000 for easy figuring, for a profit of $300,000.

Mortgage payments on the cabin would have set back our first investor a cool $1510 per month, or $18,100 per year, give or take a few bucks. Instead of investing in a cabin, the other guy stuck his $18,100 per year into the S&P 500, just buying the index. How much would his investment be worth today?

The answer is $1.2 million, give or take a few thousand.

The reasoning is simple. Even after a crazy bull market in housing, the stock market still crushed the performance of the real estate market. Even after the gift of leverage, which we didn’t give to the stock market investor. And that’s after the greatest bull market in history for Canadian real estate.

Bottom line? Rent the cottage and stick the savings into the stock market. You’ll end up much further ahead.

What You Should Know About Credit Cards and Taxes

You may know the old adage about death and taxes but many of us don’t know that credit cards and taxes may be more apt. For many, just hearing the words credit cards or taxes can send a chill up your spine. But proper use of credit cards and their relationship with taxes can be useful in order a secure a strong financial future. Understanding how to utilize credit cards at tax time can save you thousands of dollars in interest rates, help avoid back tax debt and possible future tax leans, which may be levied against personal property due to unpaid or past due taxes.

The IRS understands that many people use credit cards to pay their taxes and have decided that these people need a break. As such, the IRS has made revisions to their tax codes to help on the fees that card companies charge when processing tax payments. The charges credit card companies charge is not a set fee shared by every card company, but the IRS states the average percentage charged is around 2.5 percent of your tax bill. In order to deduct some of the fees levied with credit cards and tax payments, you may file the expense as a miscellaneous deduction.

According to creditcards.com, “Itemize and include the charge in the job expenses and certain miscellaneous deductions section of your Schedule A.” You are able to deduct up to 2 percent of your adjusted gross income, after that cap is reached only the amount over that percentage counts.This deduction is considered a Schedule A and included as a part of the cost of tax preparation. Yes for all of those of you who do not know you can deduct some of the cost of filing taxes. Expenses like your accounting fees, any tax prep software you needed, the price of tax guide books, and yes even the cost of actually paying your taxes by credit card. There are some pros and cons to paying your taxes with a credit card and it is important to understand each before you decide to make this your go to option.

Understanding and calculating the cost.

With credit cards costs averaging around 1.87 percent to 2.35, the fees associated with paying your taxes with a credit card can add up. If you owe around $4,000 dollars you could end up paying around $100 dollars, give or take $20, in credit card fees for the transaction. As stated above, you can deduct that amount in your next year’s tax return and get that money back. But with most credit cards averaging around 15% in monthly interest rates those taxes may end up costing a lot more if you don’t pay off the credit debt with in the first month.

Before you decide to pay your taxes with a credit card, be sure to check the interest rates offered by the IRS and see which is higher. In most cases, if you owe less then $25,000 in back taxes the IRS can offer better rates and a payment plans which are often 60 month term agreements. Michael Rozbruch, founder and CEO of tax negotiation company Tax Resolution Services, states “Of course, you’ll still have to pay interest and late penalties. If you fail to file on time, the IRS charges 5 percent of the amount owed for each month that your return is late up to five months. Once you file, you still have to pay one-half of 1 percent of the amount owed for each month that the payment is late. Once you set up an installment agreement, you get somewhat of a break, as the late penalty drops to one-quarter of a percent per month.”

There are also additional cost associated with late or non-payment. The IRS can and in most cases will charge an additional interest rate, which equals the federal short-term rate plus 3 percent, set quarterly. The IRS also can take ownership of possessions or place leans on assets in the case of default or non-payment. Credit cards often do not posses the same powers of the federal government so in a worst case scenario it maybe best to declare bankruptcy and deal with the bad credit over having the IRS take you home.

Secure credit cards with 0% interest rates, and with a 0% APR.

Obtaining a 0% introductory interest rate credit card is your best option. Credit cards can be for savvy debtors too via a 0% balance transfer. Many companies are beginning to offer special introductory incentives for new card owners, like 0% interest rates and 0% APRs. This can be a great option when deciding to pay your taxes with a credit card. As long as you pay the remaining balance of the card before these incentives end you can save a large amount of money in interest rates saving you thousands of dollars. Many people will be tempted to use their credit cards to pay off their taxes in order to receive additional rewards offered through reward programs. This can be tricky and often not very beneficial as most rewords cap-out around 1% and most fees associated with using your credit card to pay your taxes will be around 2% and that is a losing proposition. If you are getting close to the end of your 0% offer, it is possible to apply and receive a new credit card with the same 0% offer and do a no cost full transfer extending your no interest rate benefit.