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.