Are you thinking about buying an investment property? Before you sink your savings into the rental market, there are a few questions you should ask yourself. How do you feel about being a landlord? What are the hidden costs of being a property manager? Are there legal considerations you should know about?
Owning one or several properties can be profitable but it’s not without risks. A good way to start getting your thoughts in order is to make a spreadsheet of all the costs associated with home ownership, mortgage interest, property taxes, insurance, utilities, property management fees, and hidden costs. Then, determine how much you would charge monthly for rent, and subtract the difference. Need help understanding the market and determining how much you should charge for your rental property? Give us a shout – that’s why we are here!
The good of real estate investing
- The number one reason to get is the market is right in the name…it’s an investment! If you’re buying while real estate prices are low, you’ll likely be renovating the space so you can maximize the rent from your property to make a profit. Right now, the rental market is hot with rents increasing, so it’s a good time to invest. Working with leading industry experts, like the Shirriff Wells team at Royal LePage, will ensure you find the most opportune properties which will increase the return on your investment with a few updates.
- Receiving a monthly income. If you’re renting to family or friends, then you know that you will have a steady income of rent coming in each month. Be sure to get references for renters you don’t know so you can check to see if they’re reliable and be confident that they will in fact pay their rent. Although you will have to use some of your rent money for expenses and upkeep, it’s nice to know you will have a steady income stream.
- Increases in real estate values over time. Although the housing market fluctuates, no data shows that the housing market will dramatically crash. After all, real estate is one of the best investments you can make. Buying property in growing areas is a smart way to increase the value of your home. If you’ve owned your investment home for a while, it will generally increase its equity over time which you can use to renovate the home for a bigger profit, or take those funds out and put them towards your next investment property.
- Getting a tax deduction. Everyone loves a break on taxes, right!? You can deduct certain related expenses in your gross rental income like your mortgage interest, property taxes, insurance, maintenance costs, property management fees, and others. If your expenses exceed your rental income, you may be able to deduct the loss from your other sources of income.
The bad of real estate investing
- If you don’t do the “investment” part right, then it may leave you in a lot of debt. You should only buy an investment property if you can easily pay your bills on your existing home. Buying a second home is not the solution for making an income if you’re having trouble with your finances. An investment property should only be looked at if you can afford a sudden, large home renovation that you didn’t plan for. You never know if one of your tenants may trash your home or if interest rates will skyrocket. It’s a good idea to budget 2% of the purchase price of your property for maintenance and repairs. You’ll also need a rainy day fund to cover operating costs if your property is vacated for a period of time and you don’t find new tenants immediately. Sounds like a nightmare, right? Well, there are always the advantages of owning an investment property to focus on! It’s a balancing act.
- Responsibilities of being a landlord. You have to factor in the costs of repairs on a home that is out of your control. Unfortunately, not everyone treats their rental home like their own. Having a difficult tenant can cause you a lot of stress and you may not be able to get your money on time. If you own multiple properties, you could look into hiring a property manager to handle these responsibilities for you. If you have to go to court to evict them, there will also be the added expense of legal fees.
- Depending on the real estate market, it may be stressful to sell your investment property. Although the housing market is not as hot as it was at the beginning of the year, at the end of the day, you still want to make a large profit from the sale. Working with a reputable real estate team, (wink, wink, nudge, nudge), can ensure you sell your home for top dollar as quickly as possible.
- Rental income is taxable. This extra taxable income might subject you to a higher marginal tax rate which means you would be paying more tax on every additional dollar earned. It can also impact government benefits in the future, so it’s something to look into and out for but, working with a broker can help you keep an eye on things like this. Be sure to speak with your Accountant too!
Our Best Advice
Luckily, you have found the right team to help guide you on your exciting investment property adventure. As experts in the real estate industry, we always strive to provide exceptional customer service and give experienced, thoughtful advice whether you are investing, buying or selling your home. Get That Shirriff Wells Feeling today by contacting us at 416-495-2746. We’re here to help and we look forward to being by your side on this exciting adventure!