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Fred Lum/The Globe and Mail

Buying a cottage is most often an emotional purchase of an idyllic family haven -- so don't kid yourself into thinking it's also a sound financial investment.

Financial planner Caroline Nalbantoglu describes owning a recreational property as a lifestyle choice, not a road to riches. "I don't have a single client who sees their cottage as an investment decision," says Ms. Nalbantoglu, who works with PWL Advisors Inc. in Montreal.

Most people who buy a cottage don't plan to sell it five years later, she said. Instead, they want to use it a family vacation gathering-spot and eventually, as a peaceful place to retire. So the decision to buy a recreational property should only be made after some serious number-crunching.

"Some people love the lifestyle, and if that is the case, they should buy one," says Gail Bebee, personal finance speaker and author of investment primer No Hype: The Straight Goods on Investing Money. "If you look at this as a pure investment, there are better ways to invest your money with less headaches."

A pricey proposition

Paying the property tax bills, the upkeep and insurance, not to mention a second mortgage, for a cottage on a lake or a cabin in the mountains that the family will use for a few weeks each year is a pricey proposition, Ms. Bebee says.

Last year's economic downturn slowed sales in the recreational property real estate market, which had been going gangbusters for several years on the back of a soaring stock market and low interest rates. The 2009 Recreational Property Report by Royal LePage, released in June, pegged the national average price of a waterfront, land-access, three-bedroom cottage at between $370,000 and $600,000.

The high purchase price aside, Ms. Bebee says cottages are a bad financial investment because it is an illiquid market. That means people who sink their money into a recreational property and find they need to get it out quickly might find themselves with no buyers.

"As with all real estate, investments in cottages are risky in that the return is not guaranteed, and you might not even end up getting your principal back," she said.

A big part of the cottage value equation boils down to location. A cottage that is within a few hours' drive to a big city and is perched on a body of water is more likely to increase in value and should be easier to sell. A recreational property that has a range of amenities and is close to activities will also have greater appeal, especially for Baby Boomers who want their retirement home to be comfortable and convenient.

High cost of ownership

Although owning a cottage conjures up romantic images of hammocks and sunsets, there are high ongoing costs, such as property taxes and insurance, associated with ownership. Some lenders are reluctant to approve a mortgage for a property that is in a remote location. Insurers could likewise be averse to granting coverage for a property that sits empty for 90 per cent of the year.

Cottage repairs also eat into a cottage-owner's profits. Whether it is a rotting dock, torn window screens or a septic tank that needs to be fixed, cottages are a money pit when it comes to maintenance.

To help cover costs, some people choose to rent out their cottage for part of the year. But being a landlord brings with it a host of other obligations. The property needs to be advertised, the tenants screened, the cottage cleaned before and after each use. Wear and tear is also an issue, as well as concern that the cottage will be damaged.

"Renting could make it a better investment but it still consumes a hunk of your time to manage the property," Ms. Bebee said.

Finding a way to transfer the cottage to the kids is another major problem, says Christine Van Cauwenberghe, director of tax and estate planning with Investors Group in Winnipeg.

Any change in cottage ownership - either after the parents' death or during their lifetime - will be seen as a transfer at fair market value and trigger capital gains tax. The final tax bill can often run into tens of thousands of dollars and unintentionally force the remaining family members to sell the cottage. For a full story on how to hand down the family cottage, click here .

Ms. Van Cauwenberghe says couples who own a principal home and a recreational property can designate only of them as their primary residence. In other words, they need to decide whether it is more advantageous to pay the capital gains tax on their home or their cottage.

"We recommend that people keep track of any renovations or repairs they do to their property so they can figure that into the calculations," she says.

To rent or not to rent?

Owners who plan to rent out their cottage should make sure to go up there for at least part of the year. Doing so will make it a personal-use property and allow owners to retain the option of designating it as their principal residence. "If the property is seen as a rental property, you would not be able to claim it as a principal residence," Ms. Van Cauwenberghe says.

The rental income needs to be ancillary, which means owners can rent it out from time to time but that the rent money should not be the real or only reason they bought the property. To be considered a primary residence, owners can not make structural changes to their cottage, such as converting it to a duplex.

People lured by the cottage dream should come up with a budget to see if it is feasible for them to buy a recreational property, particularly if they are only going to use it for a few weeks each year, she said. It might actually make more financial sense to rent a place each summer and invest your money elsewhere.

Ms. Van Cauwenberghe often recommends that clients keen on buying a cottage rent in one area to make sure they like that community and understand what owning a cottage involves.

"Although there may be a gain in a property in the end in terms of an investment, this is not like buying a mutual fund where you have no emotional investment. This is a very sentimental and personal decision."

Roma Luciw is a writer and web editor of the personal finance site. Please send any comments and story ideas to