Have you started thinking about buying an investment rental property? Before you decide to follow such a path, make sure you do your research—simply hanging out a For Rent sign isn’t enough when it comes to successfully renting out properties. Remember that there’s a very wide range of options available, such as single-family homes or commercial buildings. As such, you need to familiarize yourself with the different housing options out there.
A Good Investment?
Is an investment rental property a good investment? The answer to this question can vary based on a number of factors.
- How will you finance the purchase? Taking on a huge amount of debt just to get rental income is a bad idea. A good mortgage broker can help you figure out the answer to this question.
- How much can this property make you? Local market conditions determine how much you can charge for rent, so look for a place where rental income covers overhead costs.
- How much will property maintenance cost? You can buy a “fixer-upper” or a like-new property. You can buy a property that you’ll need help managing, or one that you can manage on your own. The type of property you buy will determine the level of investment required of you.
Advantages of Rental Property Investment
There are a few advantages to rental property investment.
- Certain expenses can be deducted. These expenses include property taxes, maintenance/upgrades, utility bills (if included in rent), mortgage interest, insurance, and property management.
- Rental property losses can become tax relief. The loss stemming from overhead exceeding rental income can be subtracted from any other income sources you have, potentially reducing your tax bill.
- Regular monthly income. Other investments’ interest or dividends pay out sporadically, but an investment rental property owner will have steady, predictable income so long as tenants pay on time.
- Property values tend to be more stable than the stock market. Stocks can be bought and sold quickly and easily, and can thus fluctuate wildly. Share prices can change as much as 5% in a single day. But because real estate is a longer-term investment and property takes longer to buy and sell, market condition changes don’t necessarily dictate the market crashes and massive sell-offs seen in the stock market.
Drawbacks of Having an Investment Rental Property
Despite the advantages, there are a few drawbacks to having an investment rental property that you need to keep in mind.
- Problem tenants. Non-paying tenants can be problematic, especially if money is tight. You can try to screen potential tenants, but it’s easy to lose track of late-paying, destructive, or otherwise problematic tenants.
- Hard to sell in the future. Real estate investments are not liquid—properties can take time and be expensive to sell depending on real estate and legal fees.
- Financing difficulties. Canada’s new mortgage rules require a minimum 20% down payment when purchasing a second property, and you may also need a mortgage—and this is in addition to the added monthly expenses you can expect to absorb.
- “Landlording” is not for everyone. You may have trouble keeping up with the upkeep necessary on your investment rental property, or you might just not want the hassle of dealing with tenants. If this is the case you could hire a property manager, but bear in mind that doing so will reduce the income you receive from the property.
If you feel ready to take on such a responsibility, FamilyLending.ca is the best place for you to get pre-approval.