December 1, 2019
Did you know that owning one rental property can completely change your family’s life long term? Yes, that’s true. Andrew Carnegie claimed that 90% of the world’s historical wealth has been created through real estate.
If it worked for others – think of the potential rental property has for you.
Owning even one rental property can make the difference between “just getting by” and “living a life without worries” in retirement. It can make the difference between needing to work during retirement and having enough to live a comfortable life.
It’s something you need to consider seriously. Maybe you’re wondering how owning a rental property that could have such a big impact on your retirement. Let me explain:
The Big Benefits of Owning a Rental Property
Owning a rental property may seem expensive and out of reach at first, but the good news is it’s neither of those things. And the rewards can be life-changing.
Here’s what happens when you own just one rental property:
As soon as you buy a rental property it’s value starts increasing, without any effort from you – thanks to appreciation. The property will appreciate approximately 3% per year. Over five years, it can appreciate by 15-20%.
While your property value is appreciating, someone else is paying your mortgage.. Each mortgage payment is made up of interest and principal – meaning a portion of each payment is applied to the balance of your mortgage. You can expect those payments to pay off the balance of the mortgage by 5-7% every year. As the mortgage is paid off – your equity keeps growing.
Both appreciation and mortgage reduction happen almost passively with very little effort from you. You can and should employ a property manager to help you find a tenant, collect the rent, and maintain the property.
Your accountant can help you with tax savings in many ways when you own a rental property.
This biggest and best source to fund the downpayment of an investment property is a home equity line of credit secured against your home (known as a HELOC). The interest cost on a HELOC is tax-deductible when it’s used for investment purposes, such as RRSPs, Mutual Funds or rental property.
The interest you paid on your HELOC can be used as a tax deduction on your personal income, resulting in a larger tax refund for you. Since everyone is in a different tax bracket, consult with your accountant regarding tax write-offs.
Paying For Itself
Before buying a rental property, a critical first step is to find a property that can generate a positive cash flow. This type of property can be difficult to find, especially in expensive cities like Vancouver, BC.
It’s difficult, but this is one of the most important steps you need to take before you invest. As you identify and analyze potential properties, consider increasing the down payment in order to create positive cash flow faster. You’ll also need to evaluate current rental rates in the area you’re looking to buy.
The rent will cover the cost of owning the property, including paying the mortgage and covering other expenses. The good news is that rental income keeps increasing with time because rental rates continue to increase – a trend that’s predicted to continue.
More than half of Canadian cities experienced double-digit growth in rental rates this past year alone (2019). According to the data collected by Rental.ca, rents on average Canadian properties increased by 2.1% from August, 2019 to September 2019, and a 1.2% increase in Q2 over Q1 this year.
Vacancy rates for a rental property in Vancouver, Victoria, and Abbotsford can be tracked on the Canadian Housing and Mortgage Corporation website here.
Rent keeps increasing because more people are looking for homes to rent and less rental properties are available. Therefore, your property’s income will increase over time. You can use this extra income to finance your life, pay off the mortgage on your principal residence or save the money.
Expenses of Owning Rental Property
It’s important you gather all the information before you make any investment – a critical piece of the puzzle being expenses associated with owning a property. This is a key part of your investment strategy because it helps you plan accordingly.
Here’s a list of costs of purchasing and owning a rental property:
- The cost of a property manager who will take on the day to day tasks (approximately 8-12%)
- Financing the down payment if necessary, remember this is a tax deduction and preferred
- Maintenance expense – 3% of the gross rental amount
- Planning for vacancy – 8% of the gross rental amount
- Property Taxes
Time To Retire
When it’s time for you to retire, the rental property becomes an asset that will provide you with a steady monthly cash flow. Assuming you do a great job managing the property over the last 20 or so years, your house(s) are paid off, you can expect it to produce atleast $2,000 to $4000 per month.
By investing in a rental property early, you’ll have more cash available for retirement than you could possibly save through a lifetime of work. And definitely more than the $13,000 that Canada Pension Plan will provide per year. You have control over how your retirement will look and that’s a valuable gift for you and your family.