Rental Income Properties – A Solid Investment
Just like any other investment, real estate and rental income properties have their advantages as a good investment, but there are also some drawbacks you should be aware of. The good news first:
You are leveraging other people's money to make money. Firstly, the bank's money (in the form of your mortgage loan), and also your tenant's rent money, which is going a long way to paying off that loan. Can you think of another investment whereby a bank will lend you up to 80% or more of the total investment amount and someone else will be paying that off for you while you build equity?
Real estate is generally stable over the long term. Sure, real estate (along with the economy at large) has cyclical ups and downs, but most cities, Calgary included, show a significant upside (appreciation) over the long term. As a hard asset, real estate offers an opportunity to diversify your investment portfolio beyond equities and the stock market.
There are favourable tax advantages in owning rental income properties. Unlike with your primary residence, an investor in a rental income property can make a number of tax deductions to offset income, including:
- the interest on your rental income mortgage
- maintenance and management expenses
- advertising expenses
- insurance expenses
- property taxes
Photo by Kars Alfrink
Real Estate Investing: Managing Risk
While we believe that the benefits of real estate investing far outweigh the risks, there are some risks associated with rental income properties. Here they are, so that you can largely avoid them!
Beware of buying at the very peak of a market, which is followed by a bust and falling real estate prices – this will matter if you plan to sell the property quickly (flip).
Excess maintenance costs, often associated with older properties, can erode your profits by requiring too much maintenance. An investor must do a thorough job in assessing the key components of a property including the furnace, air conditioning, electrical systems, and plumbing.
Vacancy issues – if the property is desirably located, well-priced and appealing to renters, this may not be an issue ever; but to be on the safe side, it's recommended to budget for and expect at least one month of vacancy per year.