Are you thinking of buying a property to rent out to others? Perhaps even to your own adult children, to help them get a start on life? Before you decide, do your research. There’s a lot more to rental properties than buying a building and hanging out the “Vacancy” sign.
First of all, there's a wide range of choices when you're looking for income properties. For example, you can buy:
- Single family homes or multi-family ones
- Commercial or industrial buildings that can be rented to business people.
You can spend less than $100,000, or invest millions of dollars. The question is, will it be worth it?
Is a rental property a good investment?
This can vary, depending on a number of factors. For example:
- How will you finance your purchase? It may make sense to buy your house with no money down. But taking on a huge amount of debt for the sake of rental income may lead to financial disaster.
- How much income can this property generate? What are rents like in the same area? Vacancy rates? Local market conditions determine the rents you are able to charge. Look for a place where the rental income covers the cost of buying the property and paying for it.
- How much will it cost to maintain this property? You can buy a building that needs a lot of work, or one that is newly renovated and will need minimal repairs. You can buy a property that you can manage on your own, without extra help. Or, for larger properties, you can hire an onsite superintendent or a property management company.
What are the advantages of a rental property investment?
- You can deduct certain expenses from your income – reducing the taxes you owe. The list includes: - Mortgage interest - Property taxes - Insurance - Maintenance/upgrades - Property management - Utility bills (if you include them in the rent).
- Losses from your rental property can turn into tax relief. If your expenses exceed your rental income, you can subtract that loss from any other sources of income you have. This could reduce your total tax bill.
- You will get regular monthly income. Most other investments that offer interest or dividends pay out only once or twice a year. As long as your tenants pay on time, you know exactly what income you will have and when you will receive it.
- Property values will likely be more stable than the stock market. With stocks, you can buy and sell shares very easily and quickly. So, share prices can fluctuate very wildly. It is not unusual for the share price of a company to change as much as 5 per cent in just one day.
Property owners, on the other hand, tend to view real estate as a longer term investment. It takes longer to buy and sell. Even when market conditions change, you don’t see the overnight market crashes and massive sell outs that you sometimes see in the stock market.
What are the drawbacks of a rental property investment?
- You may have to deal with problem tenants. Working with non-paying tenants can be challenging and stressful if cash flow is tight. Of course, you can try to screen your tenants. But it’s not always easy to tell who may one day fall behind on paying rent, damage property or cause other problems.
- It may be hard to sell your property later. Real estate is not a liquid investment. That means it can take time to sell, depending on market conditions. It can also be costly to sell due to real estate and legal fees.
- It can be hard to finance your purchase. Under Canada’s new mortgage rules, your down payment must equal at least 20 per cent when you buy a second property. You may also need a mortgage. And, you will have high monthly expenses to cover when you own a building. Of course, you hope the income you receive from your tenants will cover this.
- Being a landlord is not for everyone. Rental units need repair – sometimes on an emergency basis. You might find it difficult to keep up. Or, you simply would not want the hassle of dealing with tenants. ou could hire a property manager. But this will reduce your income from the property.
Remember: Buying a rental property is an investment.
It’s vital to do your research before you commit your dollars. Use this checklist to help you get started.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.