Investing in rental property is a great way to generate income and can offer significant payoff once you’ve taken the proper steps to prepare for this long term investment. Metro Vancouver’s housing market has seen significant growth in home sales while 2021 has proven to be a seller’s market.
Before taking the leap and purchasing rental property, it’s important to be advised and aware of benefits and risks associated with your investment.
Mortgage Approval
In order to close on a property, you’ll need to get approved for a mortgage. Though the process of getting a mortgage may seem like the most stressful and tedious part, it’s important to remember that this is a vital step in starting this process. Each type of mortgage loan requires different qualifications, so be sure you have a good credit score, a low debt-to-income ratio, and a large down payment.
Greater Return on Investment
Utilizing borrowed capital for an investment property allows you to use a smaller portion of your own money, thus resulting in higher return on your investment in the long term. Real estate is considered a high-performing asset because of this. As time passes and your property value appreciates, as does your return on investment. When leasing property to tenants, their rent payments can then go towards any interest on your mortgage loan or marginal expenses. As the profits you gain from renting out your property surpass the interest you owe, this can then lead to an increase in your ROI.
Tax Benefits
Tax deductions are a benefit to owning real estate. It allows for you to keep more of your taxable income in your pocket.
Depreciation: Real estate gives you tax benefits by way of depreciation if the property is providing you income. Landlords can deduct the cost of property over several years.
Repairs: The cost for repairs is deductible during the year in which they are done. Repairs such as repainting, replacing of broken appliances, and fixing floors are often tax-deductible.
Home office: If you work from home, you can likely deduct home office expenses from taxable income, depending on whether you meet certain requirements. Check out this link for more details.
Interest: Landlords can deduct interest from mortgage interest payments on loans used to buy or renovate the property.
Passive Income
When you think of passive income, most often stocks and bonds come to mind. Investment real estate is a classic example of a passive income stream that earns you money without demanding as much work from your end. This form of investment is most valuable over the long run when gains can be seen from appreciation.
With this being said, it is important to note that finding tenants to rent your property does not mean that your work is over. As a landlord, you will have to remain on top of routine tasks like collecting rent and maintenance of the property.
The basic strategy if you’re trying to retire on landlord income alone is this: purchase a property (or multiple) for a couple of decades, generate a high net worth, use the cash flow to supplement your retirement fund, continuously pay off mortgages using rental income, and then sell for a cash intake when you decide to.
Alternative to Stocks
Real estate investment is a more tangible asset and is much more stable when it comes to investing in stocks or other financial products that are not tangible. Though real estate is not as liquid as stocks, there is substantial room for growth and is just as good a form of passive income. Though stocks can be easily bought and sold through newly developed apps, they are much more subject to market, economic, and inflationary risks.
With that being said, real estate investment is relatively much more stable and provides greater diversification with better returns at a lower risk compared to stocks. As the value increases on your property, your investment also rises which you can then put towards your retirement or saved for a special occasion.
Legal Obligations
As a landlord, you need to become familiar with the landlord-tenant laws here in BC. It’s important to understand your tenants’ rights and your own obligations when it comes to things like security deposits, lease requirements, fair housing, and more in order to avoid any legal issues down the road.
Costs
Property Transfer Tax
An additional property transfer tax applies to foreigners or non-residents of Canada – an additional 20% of the purchase price. Typically, its around 1% on the fist $200,000 and 2% on the remaining balance.
Legal Fees
Lawyer/Notary fees range according to the complexity of the transaction, but they should range from $1,200 to $1,500. Be sure to factor in this cost when sorting a budget.
Home Inspection Fee
It’s always recommended that you get a home inspection by a certified and licensed home inspector. It will cost you around $500 to $800 depending on the size of the home.
Annual Property Tax
When you own a property in B.C., property taxes must be paid annually for each property you own. The amount you pay is based on the funds needed to provide services for the year. Your property taxes must be paid
Strata Fees
Your monthly strata fee is money that the strata corporation uses to pay common expenses within the development, i.e. maintenance of the interior and exterior, garbage removal, concierge services (if applicable). The fee is assessed by taking the total cost of the strata’s expenses and dividing that by the unit entitlement of your strata lot. Simply put, the larger the square footage of your home, the bigger your fee.
Strata Insurance
Strata property insurance provides coverage for the strata property, common property and the strata’s contents as defined by the property title. This can include garden equipment, any of the common areas, car parks, gardens, floors, ceilings, and if your strata building has, swimming pools.
Important things to look into
Rental Restrictions
If you plan on purchasing a unit within a development, you have to ensure that it is a rental friendly building. There are many types of rental restrictions that vary among different strata corporations. For example, some buildings will allow for a minimum of at least 30 days or 1 year to lease. Others might have no restrictions on the duration at all. It is important to know whether there is a maximum number of units that can be rented out as well.
Capital Gains on a Non-Primary Residence
In Canada, 50% of the value of any capital gains are taxable. Should you sell your investment property at a higher price than you paid (realized capital gain), you will need to add 50% of the capital gain to your income. This means the amount of additional tax you’ll actually pay will vary depending on your income and what other sources of income you have. It is important to consult this with your accountant and or real estate lawyer as situations vary from person to person.
Leverage Your Equity
While you are paying your mortgage or renovating your investment property to increase the value, you can leverage the equity to further your investments. The difference between your home’s value and the amount you still owe on your mortgage is the equity in your property. Any difference is then your profit.
If you decide to keep the home, you cannot use all of the equity, though you might be able to take out up to 80% of the value of the home and invest it into more real estate. This is a great way to increase your portfolio without having to wait until you’ve saved enough for a down payment.
Appreciation
Real estate values tend to increase over time and with a good investment, you will be able to generate more profit when it comes time to sell. Rents also tend to increase over time which can lead to higher cash flow. See the chart below for an illustration of the Home Price Index.
Typically, most people will choose to work with a real estate agent when buying a home. While this works well for primary residence buyers, not all real estate agents work with investors. If you plan to go down this route, be sure you meet with several agents and spend time picking the perfect match who will offer you the service you require. As a real estate agent, they will have access to the MLS listings to aid in finding the properties that are for sale. Keep in mind that you need the property to be affordable, in a sought-after area for prospective renters, and in an area that will generally appreciate. It is important to go with an agent who understands your needs as an investor in order to find the right home.
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