Income Properties: The Pros and Cons of Buying an Investment Property
Do you have a financial advisor? Many of us hire professionals to help us manage our money more strategically. However, we often don't have a plan or seek advice when it comes to our investment in our homes. Some of us tend to see our homes only as a place to live, and we fail to consider the investment side of things. Luckily, Team Broady offers services to help you regularly review the value of your property(ies) and look for ways to leverage your equity. After consultations, we've helped several client families discover opportunities that they didn't even know existed. In some instances, our clients have learned how to leverage their home equity to become landlords and start a real estate investment portfolio. If you're thinking about buying an investment property, here are some pros and cons, and some lessons we've learned in our personal experience with owning rental properties.
Equity and Appreciation of the Property
Real estate investors should understand that to be successful, they must think long-term. History has proven that, more often than not, real estate increases in value over time. As a landlord, you can benefit from the future appreciation of your property in addition to the income it produces from being rented. Plus, if your property is producing positive or break-even cash flow, the tenant's rental payments will cover your monthly mortgage payments, lowering the principal balance each month. This means you’re building equity in the property without having to pay the mortgage or interest yourself.
A solid investment portfolio can be helpful during retirement, as these investments become valuable assets that can be sold off, or even passed on to other family members or dependents. We’ve worked with many clients who purchase condos or houses to be rented out now, which they intend to pass on to their children when they become old enough to own their first homes. We’ve also seen parents purchase investment properties for their children to live in while they attend university, either with the intention of keeping it as an investment, or selling it off after 3 or 4 years and hopefully making a small profit.
In the long run, one of the biggest advantages to becoming a landlord is the rental income. Although this isn’t always possible at the very beginning, some investors are willing to carry a property with a negative cash flow early on. The objective being that eventually, as the mortgage gets paid down and the rental income increases, they will reach a positive cash-flow point. This is why it’s important to ensure that your rental property is well maintained. This should allow you to continue to raise rents in line with competitive market values.
Another significant benefit of owning a rental property is the tax breaks. There are several tax deductions available to landlords in Quebec, including:
- Business deductions (if the property is owned by a company).
- The operating costs, including property insurance, property taxes, and certain maintenance expenses or repairs.
- Mortgage interest Many of these benefits are only available to you as a landlord, but they can add up to some tax savings over time.
Repairing and regularly maintaining more than one home can be time-consuming and expensive. You could place yourself under significant financial strain if your properties aren’t generating enough cash flow or if you haven't set aside enough money for these additional costs. Suppose your rental property experiences a problem that requires immediate attention, such as a broken furnace in January or a burst water pipe. In that case, it's up to you to fix it. It doesn't matter if you're on vacation or it's three o'clock in the morning. You'll need to be prepared for this possibility. Difficult TenantsYou need to find and vet prospective tenants to make sure they are reliable renters. It's essential to find people you can trust to respect your rental terms and conditions, as well as your property. This means meeting with potential tenants, perhaps showing your rental property several times, and following up on references, which can be time-consuming. Plus, the laws in Quebec heavily favour the tenant over the landlord, so if you have a tenant who doesn't cooperate, it can be a complex and unpleasant process to evict them.
Taxes and Insurance
Although you can benefit from some tax incentives as previously mentioned, you'll see an increase in income tax owed if your property is cash-flow positive. You will also need to insure your rental property, which means more money spent on home insurance. Plus, if you sell your rental property for more than you purchased it for, you'll have to report the capital gain, and you'll then be taxed on these gains.
Lessons We've Learned
At Team Broady, we speak from experience. We own and manage our own rental properties and we've learned a lot about what types of properties are the right fit for different types of investors. Those looking for the simplest, least complicated way to invest in a rental property might consider buying a newer condo because it’s practically maintenance-free. The major expenses like the roof, windows, and general repairs are most likely covered by the monthly condo fees. A condo may not, however, offer the same potential for future resale value and growth.
Those willing to assume a higher level of maintenance might consider a detached, single-family home. In this case, one must be prepared to budget for costs such as new windows, roof replacement, and so on, and always make sure to have a cushion of savings for emergency repairs.
Multi-family dwellings such as triplexes, or even apartment buildings, can also be attractive and lucrative long-term investments. However, the bigger the building, the more complicated and expensive the ownership process. These properties are usually best suited for more experienced investors.
If you’re interested in learning about more technical aspects of real estate investing, like vetting deals, calculating CAP rates, and finding the best opportunities, we recommend booking an in-depth consultation with a trusted real estate broker.
Need help? Team Broady is here! Contact us today at 514-613-2988 or by email at email@example.com.