Insights
Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published in Canadian Family Offices on November 8th, 2024 – by Sarah Bull, Partner & Portfolio Manager of KJ Harrison Investors
For decades, Florida has been a destination of choice for Canadians looking to escape winter’s doldrums and enjoy the sunshine. Many have gone beyond simply vacationing and have made it their second home. By 2013, according to a report from BMO, more than half a million Canadians owned property in the state, and Canadians still rank as the number one international buyers of Florida homes, accounting for 18% of foreign purchasers in 2023, according to Florida Realtors. Clearly, Canadian snowbirds love to flock to Florida.
But for how long will that continue? If you own a vacation home in Florida, as many of my clients do, it is a question that has to be on your mind, especially this fall.
Two powerful hurricanes have hit the state in 2024, and while the expert consensus is that the damage from Helene and Milton could have been worse, the final tally is still likely to be formidable. Beyond the billions in property damage, less quantifiable costs come in the form of disrupted lives (and livings), relocation and temporary housing, and—not suggesting this is in any way comparable to the extreme tragedies many Floridians have experienced—dashed vacation plans.
Vacation homeowners in high-risk areas for climate events are also likely to see long-term financial impacts, such as higher insurance premiums and the costs of hurricane-resistant structural upgrades to buildings, should they choose to implement them. And then there’s the question of property values, which matters if your vacation home is part of your legacy plans. Florida real estate has been resilient to climate events, but there is some evidence that “climate risk” is starting to depress markets in some areas of the U.S.
The risk is clear and present for anyone who owns property in Florida. One could say the same for California, where in many areas wildfires are getting worse. Or Mexico and the Caribbean, which are subject to the same storm dangers as Florida but may be less prepared to manage them. Or, closer to home, some parts of British Columbia and Alberta—also popular vacation-home spots—where 2024 will be remembered as one of the worst years for wildfires in history.
If, as seems likely, weather events are going to go from bad to worse, and even if you are lucky enough to have the means to afford increasing costs, who needs the hassle?
There are alternatives. Elsewhere in the U.S., snowbirds may look to the southwestern states of Arizona (already popular among Western Canadians), Nevada, New Mexico and central and western Texas—although all those areas are grappling with climate-related challenges themselves, in the form of drought and extreme heat.
Further afield, we are increasingly speaking with clients looking to Europe as a place to set up a second home. While not immune to many climate risks, including extreme heat, drought, wildfires, flooding and rising sea levels, European destinations can be worth exploring. Prices in countries such as Greece, Spain and Italy are still high, but they remain below their peaks in 2007.
A potential bonus, too, is that many EU countries offer residence by investment, or “golden visa,” programs, which can allow foreign nationals to gain permanent residence or even citizenship in return for investment. Once you have secured these “visas,” you can generally stay in the country as long as you like, as opposed to the 90-day maximum in the 28 countries of Europe’s so-called Schengen Area. Also, you may be free to travel to other European destinations when and how you want—a valuable convenience for frequent travellers as well as their family members, in many cases.
Here are some European countries of interest:
- Portugal’s beautiful weather and delicious national cuisine has long made it an appealing jurisdiction destination for overseas residency and investment. Real estate prices remain attractive compared to other Western European countries, and Portugal’s resident permit program has been a major draw for international property investors, although (like other countries) it comes with some new restrictions. In response to domestic housing challenges, Portugal recently made real estate investments ineligible for its golden visa program, but a resident permit for foreign nationals is still available through a range of investments, including investment funds, scientific research, job creation or culture. The minimums are relatively reasonable—500,000 euros, or 250,000 euros for cultural investments—and Portugal’s minimum stay requirements are generous, at just seven days per year for a total of 14 days over the two-year permit period. As in other countries, however, the process is not seamless. Among other things, buyers will need to obtain a Portuguese tax identification number—not just for property and capital gains tax purposes, but also if you expect to earn an income while there; it will have to be reported to the tax authorities in both Portugal and Canada. The relatively good news is that Portugal, as with all the other countries mentioned here (including the non-European ones), has a tax treaty with Canada to prevent double taxation of income. So, while Canadians with foreign income must file in both countries, the total payable will typically be equal only to the amount owing in the highest-tax jurisdiction.
- Like Portugal, Spain offers year-round sunshine and relatively affordable property values (in European terms), and while it threatened earlier this year to end golden visas at least for real estate investment, the program remains open to applicants. Under the existing rules, real estate is eligible for the residence by investment program, and the typical minimum is half a million euros. Buyers will need similar tax documentation as in Portugal, and they would enjoy similar tax treaty benefits.
- Greece is another popular destination, and prices remain relatively low despite strong growth in recent years. It, too, has a golden visa program, although it recently raised its minimum investment threshold from 250,000 euros to 400,000 euros, and to 800,000 euros in certain areas, such as Athens, Thessaloniki and any islands with a population higher than 1,600.
- Of course, Italy needs no introduction as a vacation destination. It, too, offers a residence by investment program, although real estate does not qualify. Investments in government bonds (minimum: one million euros), corporate shares (500,000 euros), innovative startups (250,000 euros) or philanthropic causes (one million euros) do, however.
Beyond Europe, some international investors are buying property in Turkey, which is culturally rich and offers spectacular beaches of its own. It also has one of the most affordable residence by investment programs in the world (starting at a real estate investment of just US$250,000) and very quick paths to permanent resident status and a Turkish passport, which grants visa-free access to dozens of countries. Plus, there is no minimum-stay requirement.
The United Arab Emirates is another option, in part because of its sunny climate, fine waterfront locales, and a flexible golden visa program. A minimum real estate investment of two million Emirati dirhams (about CAD$750,000) puts international buyers on a path towards obtaining a long-term, renewable residence visa valid for five or 10 years.
Regardless of the country, purchasing a vacation home overseas has numerous legal, financial and tax implications. Once you have a location in mind, a solid first step is to ensure legal representation in the country. Hiring a qualified real estate attorney who does not have any financial relationship with local realtors or developers is a must.
Financing the purchase of a foreign vacation home can be complicated, especially if you are pursuing the residence by investment option and need to meet the program’s requirements. You have a few options here, including paying for the property in cash outright, using your current home equity, or arranging an overseas mortgage with your local bank, assuming the bank supports the country you have chosen. A mortgage from a bank in your destination country is an option; however, foreigners might find it difficult to arrange financing on attractive terms and payments will likely have to be made in local currency.
It’s also prudent to familiarize yourself with real estate practices in your chosen country—agents’ commission or fee structure, and whom they represent in a property transaction. Pay close attention to the other tax implications of owning a foreign home—property taxes and capital gains taxes, in particular. And check out the laws and regulations regarding short-term rentals in the country if you’re thinking of renting it out while you’re not there. Many European cities have placed restrictions on or outright banned these types of rentals.
Clearly, there is no substitute for informed advice from qualified legal, financial, tax and real estate professionals, because if you are planning on buying a vacation home overseas, there is a lot to think about. Yet the first and most important thing to think about is the where, and it’s looking increasingly sensible to look beyond traditional snowbird destinations.
My advice: Keep your perspective broad. It is a big, wide world out there, and it might pay to look around.
