An income property, or investment property is one that is purchased with the intent to rent or to earn income. Of course there are several advantages to owing an investment property, however it does hike up the risk factor too.
Here are some great reasons why investment properties can be profitable and successful ventures.
1. You are the Boss, Manager, Owner of your New Income Property.
That means that you decide what you will buy, who you will rent to, how much you'll charge and how you will manage the property. It's all up to you! You will essentially be the boss of your small business. In this case, you can manage your affairs at any time you choose. Of course there will be some calls that you will have to act on regardless of what you happen to be doing, but for regular administration you can feel free to start working at 11am and wear your pyjamas all day.
As opposed to an investment given to a third party to manage on your behalf, like a stock or investment fund, you will have 100% control over your investment.
2. Potentially Significant Return on your Highly Leveraged Investment.
Since you may borrow more than it is possible to immediately put down on your new property, you may be entering a 'highly leveraged' situation. The greater the borrowing part of the equation is, the more highly leveraged you will be. None-the-less, with property values increasing at an incredible rate year after year, there is a very good chance that this property will make you some money when it comes time to sell down the road. Here's a great example of how this can benefit you.
The scenario is, you buy a property that costs you $100,000. You have $10,000 to put down and thus have to borrow $90,000 to afford the purchase. If the annual appreciation of the property is 5% (and we are certainly seeing much higher in Calgary), then after the first year your property would be worth $105,000. Since the appreciation affects the entire purchase price, you are leveraging your investment to work for you. After the second year your investment might be worth $110,250 given a 5% increase. Following this logic, after the 10th year your investment will be worth $162,889. That means for your initial investment of $10,000 you have made $63,000 on the investment. Of course you will be paying interest on your loan which will offset your profit, however the return in this case is not too bad considering someone else will be paying the mortgage for you.
*A very viable option for owners of investment properties is to pay the allowable additional mortgage payments throughout the year to chop down that mortgage faster. Some lenders will allow their clients to pay an extra 20% per month (goes straight to the principle) and an additional 20% of the entire year! Taking advantage of this will save you thousands.
3. Rental Income is Profit For You!
As long as you fill your rental property with tenants, you will begin collecting rent. A portion of that payment will go towards the mortgage, utilities, taxes and fees, however the rest will be profit. Every month, your tenant will be paying not only you but your mortgage provider as well. Now, considering that there will be maintenance costs and vacancy costs (should you have to go without a tenant for a period of time), you will want to set aside 5% for each of these potential incursions, 10% in total. So if you are charging $1000 for rent and your mortgage including fees, bills and taxes total $800, you have $200 left over. Take $100 of that and put it away in a safe place just in case you have to deal with unexpected maintenance costs or untimely vacancies. Take that extra $100 and throw it in your bank account!
4. Your Tenants Will Pay Your Mortgage for You
Basically throughout the first 15 years of your mortgage, you (your tenants) will be paying more interest than principle. By year 15, that ratio might balance out to a 50/50 split. So, the longer you hold the loan, the more of the principle your tenants are going to pay for you. By year twenty, your tenants are paying off most of your mortgage. Twenty or thirty years down the line when it is time to refinance or sell the investment property, your tenants will have substantially paid down the mortgage for you so you can make more from the sale.
5. Tax Write-offs are a Bonus
As a rental income property owner, you are entitled to major tax deductions. You can write off interest on your mortgage or any interest on credit cards that you've used to make purchases for the property. You can write off your insurance, maintenance repairs, travel expenses, legal fees, and even your property taxes! If you would like to see a list of these write-offs visit, nolo.com.
An extra bonus, especially for folks in Calgary, is that the government allows you to depreciate the price of your investment property based on a set depreciation schedule - even if your house is appreciating in value.
So using the prior example, if your tenants pay $800/month they pay $9600/year. If you were to make this money working, you would be significantly taxed, however as rental income you can substantially offset the taxes with the depreciation of your property and various tax write-offs.
As you can see there are more than just a few benefits to owing an investment property. Something that we didn't really touch on here is how being a landlord can be very time consuming and a huge commitment in the case where major or immediate repairs need to be completed. Also, in a climate where there are fewer renters willing to pay top dollar every month, you may have to consider reducing your rental charge.
Although this kind of venture is not risk free, few things in life really are. In this case you have to know your duties, obligations and of course your rights as a new landlord.
It's almost time for our favourite annual SHARP Foundation charity event - Lawn Bowls for Beswick House!! On August 9th, 2014 starting at 11am at the Bow Valley Lawn Bowling Club in West Hillhurst we will throw those awkwardly weighted balls as straight we can to support this incredibly important foundation.
Established in 1990, the SHARP Foundation is a Calgary-based non-profit organization. They are committed to providing a continuum of care including housing, healthcare, and support to those individuals infected and affected by HIV. The SHARP Foundation works in effort to prevent homelessness and fulfil the need for more acute health care facilities in Calgary for those with HIV.
SHARP currently operates five programs located in Calgary residential neighbourhoods. Residents are provided with affordable housing and individualized support to meet their housing, medical, and psycho-social needs. After stabilizing an individual’s medication regimen we provide programs to improve her/his quality of life and to value life.
100% of the proceeds from this absolutely fantastic event will go directly to the facility to keep it ship shape and running smoothly. This will be our 7th year at the event and every single year we laugh, play and have a couple of cocktails for the cause. There will be prizes for winning teams as well as 50/50 draws, door prizes, burgers and more!!
Check out the Facebook fan page for more details and to join the group! - 8th ANNUAL BOWLS FOR BESWICK HOUSE
We really hope that you can come out to play with us!!! Feel free to leave comments with questions and we'll get them for you.
Radon - The silent killer might be in your home right now. What is it? What to do. What about calgary?
Radon is a colourless, odourless gas that is produced naturally during the breakdown of uranium in the ground. It can make its way into your home and ultimately cause severe health effects including lung cancer. Outdoors, radon is dissipated quite easily and isn't a massive cause for concern. Indoors, however, radon can become trapped and levels will build to the point where they are a definite health risk.
Radon can enter your home any place where the house touches the soil and there is an opening. For example,
- cracks in foundation walls and floor slabs
- construction joints
- gaps around service pipes
- support posts
- window encasements
- floor drains
- sumps or cavities inside walls
- dirt floors
The amount of radon in your home depends on,
- the amount of uranium in the ground
- the number of entry points into your home
- how well your home is ventilated
Radon exposure increases your risk of developing lung cancer. It is the second leading cause of lung cancer after smoking.
The combination of radon exposure and smoking significantly increases the chances of developing lung cancer. Another reason to quit. The other two main factors that will determine the effect on you will be, how long you are exposed to it, and the level of radon in your house.
HOW TO DETECT RADON
Although almost every home in Canada has some radon in it, the levels vary from one house to another. Even if they are next door to each other.
Testing for radon in your home is simple and inexpensive. There are two options for testing.
1. Hire a certified radon measurement professional.
2. Do it yourself. You can purchase a home radon kit for between $30 and $60 from most large hardware stores. They can also be ordered online. The kits include a radon detector that is meant to be exposed to the air inside of your home and then sent to a lab for analysis.
**Health Canada recommends that you use a long-term test device for at least three months. The best time is between September and April when the windows are mostly closed.
REDUCING RADON IN YOUR HOME
If the levels of radon in your home are above the Canadian guideline of 200 becquerels/meter cubed, you need to reduce it. The higher the level, the sooner it has to be reduced. A certified radon mitigation specialist can help to provide the most effective radon reduction solution.
One of these more commonly used methods is sub-slab depressurization. A pipe is installed through the foundation floor and is piped to the outside with a small fan attached. The fan draws the radon laden air from under the house and pushes it back outside. This solution can reduce the radon in your home by more than 90%.
Also, increased sealing and ventilation of radon entry points can also help to reduce levels, but these solutions may not be as effective as sub-slab depressurization.
WHAT ABOUT CALGARY?
Unfortunately us prairie folks are being effected by radon every day. According to Radon West, a Calgary based company, in Canmore, Banff, Okotoks and Calgary they are seeing 40% consistently of homes above the action level that Health Canada has set. Although Alberta is a hotspot for Radon, there is very low awareness at this point in time.
Well, it's really not a huge surprise for anyone who has been paying attention to the Calgary real estate market, that we are up up up across the board. In some areas, we are even outpacing the long-term ten year average. At the head of the surge are the condos pushing double digit increases in sales, pricing and inventory. Who knew? Well, we did.
May saw more than a thirty percent increase in the number of condos sold this year compared to last, and the average price has also increased anywhere from 3% to 16% where the apartment style condos are on the upper end of that range. Compared to last couple of months, the monthly additional inventory of condos (new listings) has increased steadily. For the month of March there were 1119 condos newly listed (combined townhomes and apartment style). April saw 1170, not much of an increase. In May however we're looking at an increase to 1390 units newly listed. Strangely in June, the number defied us and lowered to 1217 units introduced. Although there seems to be a stammering, keep in mind that there are as of right now there are 1629 units for sale in Calgary. So far this month, the number of new listings introduced total just 35.
With respect to the condo market, a lot of talk has been centred around the higher price and the inventory numbers. If supply and demand become closer in volumes, we will approach a balanced market, where the seller and the buyer will have equal footing. This situation will also help to ease the price increases over the next while. However, if the inventory begins to run low and the influx is slow, we could see the prices climb even higher than they are now at current record highs. With these latest numbers, will it balance, or will it tip? We shall see.