If you are considering entering the real estate market as an investor, becoming a landlord can be one of the best ways to pull in a stable revenue stream over time, particularly if you can find solid tenants. The returns that you pull in can be considerable, particularly once you pay off the mortgage for that property. Let’s take a look at some of the ways that owning rental properties can benefit you as an investor.
Advantages of Owner Occupied Rental Income Property
1. You become the boss of your own money.
When you purchase a rental property, you now become the manager. You choose the property, you choose the tenants, you set the rent and you determine the way you will maintain and manage the property over time. This is pretty much the exact opposite of working in a 9-to-5 office job. In that situation, you have to adhere to all of the dictates that your boss sets and assimilate within the company culture. If you have enough real estate properties bringing in cash that you no longer have to go into the office, you will have set yourself free from the rate race. Even if your money is tied up in a mutual fund and bringing in a lot of cash, you still don’t have control over how it is invested — your mutual fund manager gets to make those decisions.
2. You have an asset that can appreciate considerably.
The principle of leverage with regard to investment means that you are putting a fairly small sum down on an investment and borrow the remainder. Let’s say you put $90,000 down on a $300,000 investment property, borrowing the other $210,000. So if you have the house for ten years, and the house appreciates in value by 5 percent per year on average, then you should be able to expect to sell it in a decade for about $488,000. You don’t get to keep the whole $488,000, but you do get to keep the whole profit ($188,000) plus the equity that you had built into the house. That is a powerful way to turn one sum of money into a handsome profit. All you did was utilize the leverage available from the bank to turn that profit. The bank made its money too, from the ten years of payments plus interest, but you stand to gain handsomely because of your investment.
3. You have an instant revenue stream coming in.
If you purchase a rental property that you plan to occupy (with a tenant who already lives in the other unit), or if all of the units in your residential real estate property that you plan to purchase are already occupied, then you have a ready-made revenue stream ready for you to take over. Let’s say that you buy an investment property where the current rent is $1,200 per month. The mortgage payment you’ve set up is $750 per month. That gives you $450 per month of pure profit each month, right? Remember — you have to build in money for hypothetical expenses — about 5 percent of the month’s rent, according to the experts. So that $1,200 rent should have about $60 shaved off for maintenance costs and $60 more put into a savings account for those months in the future when you won’t have a tenant, either because you have to evict someone who lives there now. So that $120 should go into a designated account each month handle your maintenance costs and the potential costs that losing your tenant in that apartment would incur.
4. Your tenants end up amortizing the property.
Many Canadians choose a 20- or 25-year amortization period for their mortgages. However, during the first half of that time, the payment mostly go toward the loan’s interest rather than chipping away at the principal. It isn’t until about halfway through the loan that the tide turns and most of your payments are going toward principal. However, with the money to make that payment coming from your payments, your tenants end up building your wealth for you. Even though the principal only reduces slightly in the early years of the mortgage, the good news is that it is your tenants first covering that interest expense and then taking on your principal payments. You do have to manage and maintain the property, but you’re putting other people’s money to work for you for the balance of the investment.
If you are interested in investing in property as a landlord, contact one of our property experts at Amansad Financial today. We have relationships with realtors and lenders throughout western Canada, and we can connect you with a realtor with expertise in your area — and lenders who specialize in investment property loans for borrowers at your point on the credit spectrum.