Revenue Property Advantages
There are many advantages to owning a rental property:
- Owning a tangible asset
A tangible asset is an asset that has a physical form. You understand and control the asset yourself, as opposed to - say - a stock certificate.
- Income / Cash Flow
After the mortgage, tax, insurance, and utility bills have been paid, any rent above these amounts is extra 'cash flow' (money in your pocket) that your property has made for you. Your mortgage balance is also reduced, called 'principal reduction.'
Although this is not guaranteed, your property can go up in value over the years. This is called 'capital appreciation'. Changes in interest rates and demand for housing can affect your property's value. Upgrading a property also increases its value and allows you to attract more in rent (example, turning a 2 bedroom home into a 3 bedroom).
- Tax Advantages
The interest on a mortgage loan used to purchase a revenue property is a rental income tax deduction, Further, any capital appreciation is taxed at half your personal marginal tax rate, rather than fully taxable as is other business income.
However, revenue properties are not a 'passive' investment like the stock market.
It may seem like you can sit back and collect rent money, but that is not the case. Tenants will rely on you to fix any problems that arise including plumbing, electrical or anything else that gets broken.
- Irresponsible Tenants
Although you will get a security deposit from your tenants, they may damage the property more than what it will cover, and you could be involved with a battle to make them pay for the damages. Tenants could also refuse to pay, which means you will need to send them an eviction notice and not all tenants leave the property peacefully or willingly. Properly attracting and screening your tenants is imperative, or use an experienced property manager instead.
- The Law
You'll want to research the Landlord Tenant Act and know your rights and responsibilities. You must know and abide by the law. The law, in some provinces, tends to side with the rights of the tenant over the landlord. If you don'd follow the law and procedure to the word, you will likely find you loose in a court.
Having people live in a house that you own carries liability. You want to make sure your house is up to municipal and government codes so that something like a deck railing breaking and a tenant falling off of it, is something you can avoid. You will also need liability and property insurance. If the tenant floods the house or drunk friend hurts them self, you will want them to have tenant liability insurance so that yours is not impacted as much.
When your house is unoccupied, you are making payments out of your pocket and don't have that income coming in. You will have to immediately be on the search for new occupants when someone tells you they are moving out.
Landlord's insurance is different than homeowner's insurance and here's why: You need greater protection against injury claims and property damage. You can also get protection for when or if your property become uninhabitable. This covers the rental income you would have made, if tenants were occupying your property and lasts as long as it takes to fix your rental unit (up to a year).
Make sure to research different insurance policies for landlords, and see what is covered.
- To learn more about revenue property investing, consider investigating the Real Estate Investment Network, which is a highly regarded Canadian educational network. Watch for their "ACRE" events.
- To learn more about mortgage rental property considerations, please continue reading below.
- For more questions or to inquire about a mortgage pre-approval, please contact us.