Owning an income property can be a great way of saving for retirement and gaining passive income, all while growing your equity. Unlike the stock market which is volatile, a well-selected rental property brings consistent long term returns, and can eventually be passed on to your children or partner.
When owning an income property, there are two ways you will see your capital investment grow:
1. Rental income on a monthly basis will pay off your mortgage and grow your equity.
2. Capital Gain when you sell the property, which will have appreciated in value since its purchase.
Advantages of rental property investments
- Predictable cash flow. Rental investments are relatively predictable, since rental value and appreciation operate in line in long-term market trends. This will make for reliable projections and safe decision-making.
- Tax deductions. Any expenses related to your rental property (such as property taxes, renovation, insurance, utilities and management costs) can be deducted from your rental income, reducing your tax obligations on the investment.
- Leverage. The equity you accumulate through your property can be leveraged to borrow credit for other investments, providing you plan carefully and are able to service all your loans.
- Current state of the market. Montreal’s real estate market offers steady, consistent growth. While you won’t see the type of real estate boom that characterizes Vancouver and Toronto’s real estate market, your investment is less at risk of a pricing bubble. Investors in Montreal can expect affordable property prices, steady appreciation rates, and strong rental market (almost half of Quebecers live in rented accommodation!)
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Disadvantages of owning a rental property
- It’s time and labor intensive. Unless you hire a property manager, being a real estate investor also means being a landlord. You’ll have to find your tenants, collect rent, and deal with unexpected emergencies.
- Property maintenance. If you buy an older home, it’s recommended to budget 1% of your property’s value per year for renovations, upkeep, and repairs. Condo ownership requires less maintenance, but you will need to pay monthly condo fees for the building’s communal expenses and reserve fund.
- Vacancies. Investors will also need to budget for potential periods of vacancy between leases. To minimize your risk, it’s important to select a property in a location where tenants are easy to come by, such as areas around the business centre and major universities .
Types of rental properties
Condos are the easiest and most affordable type of rental investment, and can be a good starting point for a first time investor. Browse condo investment opportunities.
Duplexes are great for investors who wish to live in the building while renting out the other unit. Upon sale of the property, you will benefit from a capital gain exemption on half the property. Browse duplex investment opportunities.
A multiplex with 3 or more doors is the most profitable, but also the most expensive type of rental investment. For properties with more than 3 doors, it is recommended to hire a property manager to oversee the day to day operations of the investment. Browse multiplex investment opportunities.
Ultimately, the profitability of owning a rental investment will depend on you market research or the market knowledge of your real estate broker .
Start by setting up a property alert to educate yourself about different options available at your budget.
Once you’ve found something you like, create a cash flow statement for the property. This involves identifying the expected carrying costs of the property, including your monthly mortgage payment, bills, taxes, and insurance fees. Next, estimate rental income based on borough averages or by researching similar properties for rent online.
Finally, plug all the values into our Rental Property ROI Calculator to determine the long term returns on your capital, and to see whether your investment is cash flow positive, or cash flow negative.