If you’ve thought about purchasing an investment property, it’s probably because the idea of a regular monthly cash flow sounds appealing. Add to that the possibility of real-estate appreciation, and it may seem like a no brainer. Investing in property can be very profitable if you know what you’re doing, but it also comes with certain risks.
Buying a rental property isn’t as simple as purchasing property and having people pay you to live there. As a landlord, you have specific responsibilities, including dealing with repairs on the property (sometimes on an emergency basis). You also have to collect the rent and at times, work with difficult tenants.
Some Expenses to Consider When You Buy a Rental Property
While buying an investment property can be profitable it can also be expensive. In addition to what you spend on a down payment and a mortgage, you also need to consider other expenses; you may incur with the property.
Expenses for a Rental Property
- property upgrades
- operating costs if the property is vacant for a time while you’re looking for a new tenant.
Will Buying an Investment Property Be Profitable for You?
To decide whether an investment property can be profitable, you need to do some careful calculations. First, you need to calculate the costs of ownership. Then estimate how much rental income you will receive. Subtract the expenses you have identified from the rental income you will be acquiring to get the taxable net rental income.
After taking out taxes, you can see whether you are making money on the property, but keep in mind; you also have to plan how you’ll pay for routine maintenance and other expenses.
Do the Research
The key to attaining a profitable investment property is to educate yourself. Before making any decisions, here are some things you should take into consideration.
- Make sure your finances are in order- Canada’s mortgage rules state that you must come up with a minimum down payment of 20% for a small rental property.
- Research the area where you are interested in buying and investment property– Figure out what the average rents are for the area and aim for areas with good job availability and steady population growth.
- Find the mortgage solution that works best for you– It’s a good idea to seek out professional advice to find the best mortgage solution to meet your financial needs.
- Choose proper insurance coverage– A rental property is a valuable asset, so make sure you’re covered by choosing adequate insurance to protect yourself financially.
- Read up on landlord-tenant laws– If you’re thinking of buying an investment property, you’ll need to read up on what the rights and responsibilities of a landlord entail as well as what your potential tenant’s rights include.
- Look into hiring a property manager– If you don’t have the time to deal with tenants and make repairs yourself, you can hire a property manager to do it for you. While this will cut into your monthly income, it can also help reduce your stress level as a landlord.
It’s essential to have a clear understanding of investment property before you commit to it. On one hand, you have specific duties as a landlord, including certain routine and emergency expenses. It’s also not always easy to sell a rental property, and of course, there’s the fact that rental income is taxable.
On the other hand, it can give you predictable cash flow, and historically the price of real-estate increases over time.