There are hundreds of new homes and condos being built in the city of Ottawa every year. As a REALTOR®, I’m often asked by clients who exactly is buying and living in all of these new properties.
The answer is: investors.
Many people choose to purchase these homes and condos as investments – also known as income properties. An income property is defined as a property that is bought or developed to earn income through renting, leasing or price appreciation. This includes properties that are either residential or commercial.
Here are some basic things you should know before taking the plunge into purchasing an income property:
What are the benefits?
One major benefit of owning an income property is that it can be a source of income for retirement. Many income property owners use it as a steady source of income to supplement other retirement funds.
You also have the option of selling the home at any time, including when you retire, to create a capital gain. A capital gain occurs if you sell your non-primary home for more than you purchased it for.
Keep in mind that capital gains are taxable, but you still can earn a sizeable amount of money if the value increases significantly. This strategy is often used by house flippers.
Finally, an income property can help to diversify your investment portfolio. Diversifying helps to reduce your overall risk, especially since your investment won’t be entirely subject to the volatility of the stock markets, as we saw during the global financial crisis of 2008.
What is the financial obligation?
As of May 30, 2014, the Canadian Mortgage and Housing Corporation made it a little tougher to purchase an income property by discontinuing its mortgage insurance product for the purchase of a second home.
What this means to you is that if you want to enter the income property world, you will need to put 20% to qualify for most mortgages. This initial investment is higher than it used to be, but if you can swing it – the long term payoffs will likely still appeal to you.
Also remember that as the owner of an income property, you are expected to conduct maintenance on your investment when required. The upkeep of things like the roof, windows, furnace, and appliances will be your responsibility. The good news is that the cost of this maintenance is deductible against your property income.
What is the time commitment?
Initially, income properties can require a lot of time.
First, you need to ensure that you are aware of all the laws and regulations attached to owning an income property, such as the Residential Tenancies Act in Ontario. Working with a REALTOR® can help get you get up to speed.
You will also need to take the time to develop a solid leasing agreement for tenants, and a strategy for marketing your income property when it is vacant.
Once you understand all the laws and regulations, find the right tenant, and have a marketing plan in place, the demands on your time will be greatly reduced.
So, if you are thinking about how to set yourself up for the long term, I suggest you consider the option of getting into the income property market. If you want to learn more, don’t hesitate to get in touch.