Winning With Income Properties

2007/10/03 Originally published in the Vernon Morning Star.

Income properties have an excellent record for profit when used as a long term investment.

On a strong market like the one we are experiencing, we tend to look for short term profits. Over recent years investors have enjoyed amazing returns by holding property for just a year or two.

Unfortunately, we cannot always rely on markets like the present one. But, a wealthy retirement portfolio can be built by focusing on the long term investments.

Start by setting up an appointment with your realtor. They'll help you sift and sort through the properties currently available. They will give you advice about which properties are the best deals. They can also assist you with determining the rental income values for particular types of properties.

Consider borrowing the down payment against the equity in your home. You will want to invest with as little down payment as possible, so you can leverage the remaining equity in your home if you wish to purchase yet another income producing property.

You will have the most peace of mind if your rental income covers your mortgage payments, property taxes, maintenance and upkeep and in some cases, strata fees.

There are two other sets of expenses you need to be aware of. Under Canadian tax law you must declare your rental income. Of course, the interest on your mortgage and the cost of repairs, maintenance and upgrades are all income tax deductible. In the early years of your mortgage, the expenses largely offset the income. But, as the interest on the mortgage becomes less of an expense, you could well be showing a monthly profit and the potential of having to pay some income tax is clearly there.

The other real expense is that of vacancy. Even though rentals are in very scarce supply presently, the fact remains that on the long term, there is likely to be some periods where you have it empty for a month or two here and there.

Your banker or mortgage broker can help you sort out your financing options. Remember to consider that with long term investments you should be prepared that there may be times you're apt to pay higher interest rates. Happily, you may also see periods of lower interest rates. Also, on a positive note, remember you can increase your rental income each year and apply that increased income to your investment property mortgage. You can raise the rent as much as you think the market will bear if you have a change in tenants. But, for 2008 you can only increase rent by 3.7%, once a year.

The beauty of income properties is that your tenant is paying off the mortgage, not you. Once it is paid off, you'll have a clear title property to sell off or that will pay your monthly income through your retirement years. You could also choose to borrow against that rental property as the equity grows and use it to acquire even more rental property(s). This is how some people build large income producing real estate portfolios.

If you sell the properties off, be aware you will have to pay Capital Gains tax on any profits you have earned. If you're paying tax, that means you've made money, which is the whole point of the experience. Agreed?

Jane Field works with RE/MAX Vernon. Jane has over 30 years experience in the Real Estate business. To suggest topics for future articles or to ask Jane questions, email her or call 503-3755.

RE/MAX Vernon | 250.503.3755 | Toll free 1.888.503.3755 | 5603 - 27 ST | Vernon | BC | V1T 8Z5 | Canada

Investment and Retirement

Winning With Income Properties