What to consider before buying an investment property

An income property can be a good way to make money, especially in retirement. However, there are things you need to consider before taking the plunge.

Here are the advantages and disadvantages of buying an investment property:

Advantages

You can use leverage: If you have equity in your home, you can use it to help finance the purchase of another property. In a low-interest rate environment, mortgage rates are lower as are the costs of buying an income property. You’ll build up more equity when you earn rental income to pay down the mortgage. In the future, you could use that additional equity to buy another property or properties but you should ensure you can make larger mortgage payments when rates increase.

You can earn additional income regularly: As long as you have a tenant, you’ll earn monthly income on a regular basis. The more investment properties you have, the more you could potentially earn. You don’t often get regular income from other types of investments.

You get tax deductions: While you’ll earn rental income, you’ll also be able to deduct any expenses. Advertising, insurance, maintenance and repairs, property taxes and legal fees are just a few of the expenses that are deductible. It’s best to consult with your accountant to find out what costs you can deduct.

Disadvantages

You may need additional financing: If you want to buy a multi-unit property and intend to live in it, you’ll need a down payment of between five and 10 per cent, depending on the total number of units in the property. But when you purchase a property you don’t plan to live in, you need a down payment of at least 20 per cent. Also, some lenders won’t recognize 100 per cent of the potential rental income you might expect to earn; some may consider just 50 per cent, while other lenders might consider 80 per cent. So, you could be forced to make a bigger down payment to qualify for a mortgage.

You might not always have a tenant: Ideally, you’ll earn enough rental income to cover your annual costs. However, you’ll still need to make mortgage payments without a tenant. You should be prepared for the worst and have an emergency fund for the times you don’t have a renter.

Your property isn’t a liquid investment: If you own stocks or bonds, you can buy and sell them quite quickly. However, it can take a long time between listing your property for sale and the closing date. This might be a problem if you need the money right away.

You have additional responsibilities: Being a landlord can be a difficult job. You’re responsible for any maintenance and repairs, and there are also some headaches you have to deal with, such as a tenant that damages your property or misses a rent payment. The alternative is to hire a property manager who can take care of those problems but at a cost to you.

While an investment property provides additional income, be aware of the pros and cons before you decide to make a purchase.