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June 2, 2016
Theresa has been self-employed all her life. When the economy slows, she has no regular paycheque to fall back on. And she has no company pension plan to take care of her once she retires. What she does have, however, is a triplex she received as an inheritance.
She is now trying to decide whether to sell the triplex, or to turn it into an income property. Before making the leap, Theresa should consider the advantages and disadvantages of becoming a landlord.
Income property advantages
Tax breaks. Theresa could deduct rental property maintenance and management costs from her taxes, as well as mortgage interest, property tax, and insurance, and more.
Security. A rental property is a tangible or physical asset, and would not be lost if the market changes.
Steady income. Theresa could receive a regular, dependable amount of money.
Income property disadvantages
Risk. There is no guarantee that Theresa’s triplex would continue to gain value over the years, and she might have to sell it at a loss.
Managing the property. Real estate would not be a passive investment. Theresa would need to be prepared to fix large problems with the house such as leaking pipes, and available to fix unexpected, urgent problems like broken appliances.
Managing the tenants. Theresa’s steady income would be dependent on finding responsible tenants that maintain the apartment’s value.
Taking the leap
Theresa has decided that a rental property is a sound decision to add to her income now and to help fund her retirement later.
Establishing a firm budget is an essential first step in the process. A good look at her finances can help Theresa determine if she has the cash flow to maintain an income property, and possibly to hire a property manager to take some of the stress off her shoulders.
An on-going budget will help her establish and maintain the emergency necessary to cover unexpected expenses and reduce the financial hardship of ever having a vacant property.
Theresa must also have the property inspected. She needs to know about any obstacles—from large structural problems to smaller renovation projects—that would turn her money-maker into a money pit. She should also assess the one factor she can’t fix: the location. An income property must be in an area desirable to tenants.
She will also hire a lawyer to clarify all the legal ramifications of her decision, including that the place is zoned for rental. In addition, she may want to look into hiring a tax expert, to help her with her newly complicated taxes, and an insurance professional, to make sure she purchases the right insurance products.
Once she is ready to look for tenants, Theresa will ask her lawyer to draw up a legal lease that gives her and her tenants security. With this lease at the ready, she will take her time looking for tenants, calling their references and running credit checks on all applicants.
If you are not as lucky as Theresa, who has inherited a property, and are looking to take the leap with her to purchase a tangible asset of your own, having a mortgage professional on your side beforehand is an essential step. Contact us to learn how SafeBridge can help you architect your future income today.
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