Investing in rental property can be another profitable way to build wealth and generate passive income. Like any other investment, it could be a downside if handled poorly. There are risks and rewards that you should consider before you invest in rental properties.
What is Rental Property?
It is a type of investment where the owner purchases the property and rent it out to tenants in exchange for rental income. It can be a family home, apartment, condominium, and commercial building. Rental properties can be owned by individual investors, corporations, or real estate investment trusts (REITs).
Risks of Investing in Rental Property:
• Vacancies
If you plan on investing in rental properties, know there are potential vacancies. Not all the time, rooms are occupied. If you don’t have tenants, you will be responsible for paying the mortgage, property taxes, and maintenance costs out of your pocket.
• Repair and Maintenance
Repairs and maintenance are shouldered by landlords, so if you plan on investing in rental properties, remember that it can be time-consuming and costly, especially if you own multiple properties.
• Market Conditions
If the housing market is down, you may need help finding tenants or selling your property.
• Bad Tenants
Finding a good tenant is rare nowadays; bad tenants can be a problem because they can cause damage to your property, fail to pay rent, or even require legal action to remove. A good tenant brings success to your rental property investment.
Rewards of Investing in Rental Property:
• Passive Income
One of the significant rewards you can get when investing in a rental property is passive income. If you have tenants, you will receive monthly rent payments, like a mortgage, that can help you with your bills.
• Appreciation
Rental properties can appreciate value over time, increasing your overall return on investment.
• Tax Benefits
Rental property owners are eligible for several tax benefits, including deductions for mortgage interest; these may include property taxes and repairs and maintenance costs.
Financing Your Investment with a Mortgage
It is a wise choice to finance your rental property investment with a mortgage to spread out the cost of the investment over time.
Steps when Financing Your Investment with a Mortgage:
- Check your Credit Score. It is essential to check your credit score before you apply for a mortgage. Check where you stand; a high credit score will help you get better deals.
- Shop Around for Lenders. Shop around and find a lender that offers mortgages for rental properties; make sure to shop around lenders and find the best mortgage deals.
- Determine Your Down Payment. Rental properties require a higher down payment than primary residence mortgages. You can put a 20% down payment to avoid private mortgage insurance fees.
- Consider Your Cash Flow. When determining your mortgage amount, consider your cash flow and ensure you can cover the mortgage payments, property taxes, and maintenance costs while generating a positive cash flow.
Points to Think About Before Investing in Rental Properties
• Location
Location is a crucial factor when it comes to rental properties. It would help if you found a neighborhood that has low crime rates, good schools, and access to amenities such as shopping, dining, and entertainment.
You will have higher demand if your location is desirable for families or individuals who work and need a nice neighborhood with easy access to amenities.
• Market Demand
Research the market demand in the area before deciding on buying a rental property. You can do this by looking at vacancy rates, rental prices, and the number of rental properties available in the area.
High demand means it’s easier to find tenants in that area, and you can also charge higher rental rates.
• Property Condition and Potential for Appreciation
The condition of the property you are considering investing in is also essential. It would help if you look for well-maintained properties, have updated systems and appliances, and structure sounds.
In addition to that, it is also essential to consider properties that have a high chance of value appreciation over time. Desirable neighbourhoods with high demand for rental properties may have a higher potential for appreciation.
• Rental Income Potential and Expenses
Evaluate the potential income and expenses before investing in a rental property. Consider factors like property taxes, maintenance costs, and insurance premiums.
Make sure that your income can cover all the expenses and still generate cash flow. Account for the potential vacancy period and the costs of finding new tenants.
Common Mistakes to Avoid in Rental Properties
• Overestimating Rental Income Potential
It is essential to research and determine the average rental rates in the area and evaluate the competition in the rental market. If you overestimate your income potential, it can lead to negative cash flow, and you might struggle to cover your expenses.
• Underestimating Expenses and Maintenance Fees
In addition to your fixed payments, additional costs like repairs, maintenance, and utility can be added. Failing to account for these expenses can lead to unexpected costs and a negative cash flow.
• Failing to Do Research Before Buying a Property
By doing research, you’re evaluating the property’s condition, researching the local rental market, and reviewing financial documents such as rent rolls and income statements. If you fail to do research, it can cause unexpected costs and lower-than-expected income.
• Neglecting to Have Emergency Funds
You must have emergency funds set aside in case you encounter unexpected expenses. It will keep your property growing and will be able to handle your finances.
Conclusion:
Investing is a gamble. If you want to invest in a rental property in Canada, ensure that you have all the knowledge you need to invest and run a rental property. One wrong move and everything I worked hard for will go to waste.
