Have you ever dreamed of owning an investment property? You’re not alone. Buying a residential property with a view to generating a rental income stream can be an appealing investment option. However, as with all investments, it is not without risk and requires careful consideration to determine whether the advantages outweigh the disadvantages.

Pros of Investment Properties

Investment rental properties offer many benefits, including:

  • Steady income stream: The monthly rent (less your expenses) can provide a reliable and predictable cash flow for years to come.
  • Property value appreciation: While there are no guarantees, historical trends may suggest your property’s value can increase over time.
  • Long-term stability: A reliable income stream plus appreciation can give peace of mind compared to other more volatile investment options. Many people also take more comfort in having a physical asset that they understand, as opposed to more abstract assets like stocks and bonds.
  • Tax deductions. Many expenses can be deducted from gross rental income, including interest costs on any mortgage, property taxes, maintenance costs, and utilities (unless your tenant is responsible for utility costs).

Cons of Investment Properties

Investment properties come with a number of financial commitments and responsibilities, such as:

  • Landlord duties: Landlords don’t have the luxury of sitting back and waiting for the rent payments to roll in. They have a responsibility to deal with things like repairs, sometimes on very short notice. You may have the bad luck of getting difficult tenants. Hiring someone (such as a property manager) to take care of these things is possible but will reduce your income stream. 
  • Capital expenses: Buying an investment property involves a steady stream of costs. In addition to a mortgage, you will have to pay for such things as utilities, repairs, and maintenance (although, as noted above, some of these costs are often tax-deductible).
  • Rental income is taxable. Net rental income is taxable income for the year. In some cases, this could push you into a higher marginal tax bracket, leaving a smaller piece of every dollar as profit.
  • Fluctuating market conditions. Rental market conditions can change quickly. You may face the prospect of having to lower the rent you can charge or risk being stuck without a tenant. Be aware of potential government policy changes, such as zoning, licensing, or building requirements that could dramatically reshape the rental market both for the short and long term.

Taking the Plunge

If you decide an investment property is right for you, here are some factors to keep in mind:

Financial Considerations

  • Are you able to take on a large real estate purchase (including a 20 percent down payment) and still have enough room to pay for other current or future financial obligations?
  • Do you have a credit line or the ability to access one easily?
  • Are you able to set aside a reasonable emergency fund to deal with unexpected costs like emergency repairs to the property?
  • Are you prepared to use your primary residence for financing?
  • Have you explored different ways in which you could purchase an investment property – personally, as part of a partnership, limited partnership, a joint venture, or through a corporation? Each has advantages and disadvantages, ranging from liability protection to different tax treatments.

Property Considerations

  • What kind of property are you considering – a condominium, single-family home, townhome, or multi-unit property?
  • What size is ideal? Remember that larger properties often mean higher taxes and more maintenance and utility costs.
  • What kind of location is ideal? Is the property you’re considering close to amenities like schools and businesses, with good transportation options?
  • If you are considering converting a property, is it properly zoned for residential occupation? If not, are you prepared to apply for a zoning change? 

Market Considerations

  • What is the short and long-term forecast for the local rental market?
  • Are many properties currently listed?
  • What local development projects are in the works (such as new transit or mixed-used commercial and residential property) that could affect the desirability of living in the area?
  • What are average rents like for the properties you are considering?
  • Have you considered your insurance options?
  • Have you familiarized yourself with landlord and tenant legislation (the Residential Tenancies Act) so that you have a full grasp of all your rights and responsibilities under the law?
  • Are you comfortable with these obligations, or will you want to hire a property manager? If so, have you factored that cost into your income stream calculations? (Note that even if you hire a property manager to assist you, legally as the owner, you will still be ultimately responsible for compliance with the Act.)

Talk to Experienced Advisors

As you can see from the above, buying an investment property is a major undertaking with several legal, financial, and tax implications. Protect your investment by consulting with experienced professionals who can help you reduce your risk and set your new venture on the right path.

Contact Tierney Stauffer LLP in Ottawa for Experienced Real Estate Advice

The lawyers at Tierney Stauffer LLP have extensive experience helping clients with residential and commercial real estate and leasing matters. We provide clients with the peace of mind that nothing will be overlooked. Our team also provides skilled advocacy for clients in litigation and alternative dispute resolution processes when real estate disputes arise.

Tierney Stauffer LLP proudly serves clients in Ottawa, Cornwall, Arnprior, Kingston, and North Bay. To set up a consultation and discuss how we can help you, contact us online or call 1-888-799-8057


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