We love real estate, we love talking about it and we love owning it. Perhaps it’s the allure of owning something tangible or the anecdotal evidence that ‘real estate always goes up over the long-term’. But when you dig a little deeper, there may be the hidden costs of owning a rental property.
REAL ESTATE RETURNS ARE NOT GUARANTEED
Yes, real estate returns tend to rise especially over the longer-term but don’t underestimate the impact of shortterm volatility. Additionally, data from the Teranet and National Bank of Canada House Price Index show that for the last decade through to 2012 real estate prices had climbed 85% whereas the TSX/Composite Index has had a total return of about 141% during that same period. Now of course this is a gross comparison with many variables and one should be cautious about relying on this type of data alone but it illustrates the point, don’t simply invest in real estate for its seeming outperformance in comparison to a well-diversified portfolio.
BECOMING A LANDLORD IS A BIG DECISION
Being a landlord comes with its own set of costs, both real and hidden. Are you prepared to be taking calls from tenants who have locked themselves out at 2am or having to deal with a broken dishwasher while you’re out of town? Think of it this way, you work for the income you earn; it is akin to having a part-time job.
Yes, you can hire a management company but remember that that cost reduces your profit. Outsourcing to a manager also doesn’t absolve you of your responsibilities as a landlord and communication is still needed between you and said management company.
Owning a rental property can be a good investment for many but make sure you do your homework first and that you are aware of the true cost of owning a rental property.
KNOW THE TAX IMPLICATIONS
Rental properties are liable to capital gains tax upon sale. Things can often look better on paper than they end up being in reality. Consider buying a property at $250K and selling it a few years later for $500K. This sounds like you’ve doubled your money but after lawyer fees, property transfer taxes and capital gains tax, you may be left with less profit than you anticipated. Don’t forget too that income from rental property is taxable so when you’re taking into consideration what your actual cash flow from the property looks like, keep in mind that off your monthly rental comes strata fees, if applicable, as well as taxes off the income you’re making.
DON’T OVER LEVERAGE
Real estate can be a great deal as you can own a piece of land with 20% down or less and so in that way you are leveraging your gains. But for this same reason, it can also be extremely risky. If and when interest rates rise, your borrowing could put you in an unfavourable situation.
PRACTICE DIVERSIFICATION
Sure, we all know that guy (or gal) who retired early and is living off the income stream produced through their various rental properties, etc. but is it prudent to have all one’s assets tied up in real estate, perhaps all within the same region? Things can go wrong in real estate (think leaky condos, natural disasters, etc.) hence the old adage that diversification is key rings true. Owning a rental property can be a good investment for many but make sure you do your homework first and that you are aware of the true cost of owning a rental property.