CHOOSING THE RIGHT PROPERTY
"People buy investments - whether a stock, a bond or a house - for two possible types of returns: the monthly or annual cash flow the investment will generate, and the capital appreciation. People will choose what kind of investment they're going to buy based on what is most important to them," explains Gary Siegle, Invis regional manager for southern Alberta and Saskatchewan.
Thus, investors valuing monthly cash flow may choose something more readily marketable to renters, such as a one- or two-bedroom condo that will rent toward the lower end of the cost scale. "But by the same token, that's not the biggest part of the market so it has less of a capital appreciation opportunity," says Siegle. "It's not that they don't appreciate, but they often don't appreciate at the same rate as a sing;e-family house," making them less appealing to investors prioritizing long-term market-value gains. It's not a question of which is the right choice, explains Siegle, but which best fits your situation. "That's a good thing when it happens," says Karl Madsen, Invis regional manager for Vancouver, "but rather than counting on that to make the investment make sense, ask yourself, 'if I sell it in a few years for the same price I paid for it, would it still have been a good investment? Will the rent cover the mortgage and costs of maintaining the property?' You don't want to be sustaining it yourself with your own income." Rather, with today's low interest rates it's not difficult to find an affordable investment property where the rental income will cover the mortgage and then some.
MAKING IT AFFORDABLE
The first question to ask of your mortgage broker is to determine how much in mortgage funding you qualify for based on your own income and the income you expect to make from the rental property. The second question, says Siegle, is one you need to ask of yourself to decide what you're comfortable with based on your personal circumstances, cash-flow situation and long-term plans. "Ask yourself, 'I may qualify for this, but can I afford it if it's not rented for a couple months? Am I comfortable with that?'"
Homeowners' insurance, property taxes, strata fees, routine maintenance and unexpected repairs are all costs to factor in, " and most of those expenses must be paid regardless of whether you have a tenant or not" - an eventuality investors need to be financially prepared for, says Siegle. "The market isn't always going to be robust; it will likely sit vacant at some point for one, two or even three months."
Investment properties are generally honoured with the same low interest rates as owner-occupied properties. However rental investors are required to have a minimum 20 per cent down payment, while a second home, such as a family cottage, can qualify for up to 95 per cent financing - though that financing must be qualified for without taking into account any rental income. As well, keep in mind that while interest costs are tax deductible, rental income in taxable, which can eat into your expected profits.
Real estate generally works best as a long-term investment, and it's important to plan your finances around that, advises Madsen. While there are some opportunities to "flip" a property for a quick profit, the transaction costs of buying and selling real estate, including realtors' commissions and legal costs, often eat up short-term market-value gains. "But if you're in it for the long haul, and particularly if you purchase three or four over time, the properties will eventually pay off their mortgages and are a great source of income in retirement.
*Excerpts from an Article seen in Home & Mortgage 2010 magazine *Written by Tiffany Sloan