Investing in real estate is within the reach of many Canadians, not just for those affluent business people or the beyond wealthy few. It would seem that more and more for first-time buyers are jumping in with both feet, purchasing a duplex or triplex; they live in one unit, and then rent out the additional units to help pay down the mortgage. Other home owners simply convert a level of the house into a rental unit, while others pursue earning extra income through flipping their homes. Why this increasingly popular addition to an investment portfolio?
Truth be told, the preference many of us have for owning real assets, an investment property can often provide ongoing income while simultaneously increasing, or maintaining, its value; every investors dream. What does that mean exactly? Well, rental income typically pays for most, or all of the expenses, associated with maintaining the property, and appreciation of the value of the property can often outpace the performance of some mutual funds and bonds. Whether the strategy is buy and hold [rental income] or flipping, cash flow is of the utmost importance; cash flow is what pays the bills. However, appreciation of the asset and its equity over the long-run is certainly a major aspect of focus, as it grows tax-deferred and provides the investor with future leverage.
Rental property affords investors with another incredible opportunity to convert personal expenses into valid business deductions. This means that travel expenses to check on your property, the use of a property management company, and so on, can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.
Just like any other investment, there are risks associated with real estate.
The main drawback of investing in real estate is the relative difficulty in converting your asset into cash, this is also known as illiquidity. Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Not very helpful if you find yourself in a tight financial situation and need cash immediately.
If you choose to utilize a buy and hold strategy, then you become a landlord. That in itself creates a whole new set of responsibilities and rules for you; and requires 24/7 availability in the event of tenant emergencies.
Despite the risks, many have added real estate to their portfolios and many more will do so themselves. If you haven’t done so yet, it is strongly suggested you speak with your lawyer and your accountant first so you can make the best educated decision possible. No matter what you do, ask yourself what your larger vision is, what your overall goal is, without knowing that you cannot develop a strategy.