Six Factors To Consider Before Investing In A Rental Property
Rental properties are among some of the best sources of passive income out there. This, however, does not necessarily guarantee that every rental property will be profitable. Following are six, key factors to consider before purchasing and second home. With the right amount of planning, you can safely and successfully diversify your overall investment portfolio.
The first and foremost factor to consider is the geographic location of this investment. The best rental properties are in areas with low unemployment rates and robust rental markets. As an investment property owner, you can certainly build sweat equity throughout the years by paying for home improvements, but the single factor that you cannot change on your property is it's location. The most desirable neighbourhoods for rental properties have top-rated schools, low crime statistics and ample options in shopping and dining.
Number Of Vacancies and Listings
The Canada Mortgage and Housing Corporation has estimated the average vacancy rate across all 35 of the nation's major centres to be approximately 2.5 percent. With diligent research, you can target communities with high rental property demand. If neighbourhoods consistently have lots of vacancies or homes for sale, this may indicate a weak local economy and potential problems in finding qualified, long-term tenants.
Building Maintenance And Management
Rental income only becomes truly passive income when property owners are able to outsource the related maintenance and management responsibilities. Take the time to price the cost of professional property management services and find a solution that's right for you. If opting to invest in a multi-unit building, you may find it cheaper, easier and more efficient to pay a single, qualified individual or couple to live on site. In either instance, make sure that you can cover all general, ownership expenses and the costs of third-party property management before finalising your investment decision. This way, you won't have to shoulder the physical, legal and administrative duties all on your own.
The Impact That Deductions Will Have On Your Rental Income
It may be possible to reduce your tax liability by deducting certain, property-related expenses from your income. These can include property taxes, property insurance, management and maintenance expenses, mortgage interest and utility charges. If your rental property results in any losses, these can be deducted as well. Hiring an accountant to handle this portion of your finances is often the best way to ensure that all available deductions are claimed.
For rental property investors, it is always critical to have a back-up plan in case tenants or reliable rent payments fall through. In addition to having enough cash saved up for a reasonable deposit, you must have sufficient, liquid funds in store for covering ownership costs for several months should you have slower than expected turnaround times or tenants who either refuse to pay or prove unable to pay their rental costs. These expenses will include your mortgage note, property taxes and ongoing building maintenance and management fees among other things.
Investment property buyers should pay close attention to local infrastructure, planned developments and the availability of public transportation. The most desirable rental properties are always situated in areas with easy access to major roadways and reliable train and bus lines. Knowing how new buildings and business will affect this access as well as other location-related features such as crime statistics, will help you determine whether or not the value of your investment is likely to grow or decrease throughout the years.
A rental property is a major commitment. Like all forms of investing, this purchase will entail a considerable amount of risk. Diligent research and careful planning will help you mitigate this risk while allowing you to optimise the resulting profits.