“Never depend on a single income. Make investment to create a second source.” – Warren Buffet

Rental properties typically have two connotations surrounding the idea, (1) it seems like a burden and waste of money, and (2) when and where can someone get started! Rental properties are a fantastic investing strategy to diversify a person’s portfolio while gaining passive income and having a tangible asset that appreciates in value. Are you interested? Let us tell you more!

Housing and renting will always be in demand

 As we learned in a previous blog, What You Need to Know Before You Begin Investing in Real Estate, the real estate market can fluctuate with buyer and seller markets. Trends can be challenging to predict and vary based on regions, whether it’s neighbourhoods, cities, provinces, or countries. However, the one factor that remains constant is that people always need a place to live, and rental properties will always be in demand.

Income from renters

Current outlook:

Constructing the appropriate rent is crucial to stay competitive and ensure overhead expenses are covered. Initially, as an investor, you might not profit from the investment, but don’t let that deter you from investing. Regardless, the initial investment may not contribute to a passive income, but the tenant’s rent is paying down the mortgage and building equity in the property. The debited equity will contribute to your overall wealth without needing to put forth your own money for the mortgage.

Tip: Before you take the plunge into rental property investing, establish the dream team and work backwards. Consult with a Property Manager to get an idea of market rental prices. The Property Manager can help you make connections with realtors, mortgage agents, lawyers – you name it!

Future outlook:

On average, rent increases by 3% to 5% per year. Suppose your property rents for $1000 per month in 2021 and rent increases by 4% per year. Using a compounding formula, the property can earn around $2665 per month in 25 years – a 167% increase from the initial $1000. In 25 years, the investment should be paid off, and the incoming rent payments are passive income. This is an additional $31,990.04 of incoming revenue per year, not including the built-up property equity. This example assumes inelastic market conditions and consistent growth; does not include overhead costs.

Future Rent = $1000 * (1+4%)^25 = $2665.84

In addition to investments, pension plans, registered retirement savings plans (RRSPs), etc., rental properties are a consistent source of income to retire on.

Rentals offer multiple ways to profit

 Compared to other real estate strategies, rental properties offer numerous ways to profit and capitalize on the initial investment.

• The mortgage is paid down: While tenants are living in the property and paying rent, the mortgage is being paid and equity is being built up. What’s the cost to you as an investor? Minimal or next to nothing! Whoop! Whoop!
• Appreciation: Over time, the asset (property) will appreciate in value. On average, properties appreciate 3% to 4% per year. Appreciation is essentially earning additional equity in the property for simply owning the property.
• Cash Flow: As previously mentioned, having tenants will contribute to significant cash flows in the future and can potentially contribute to cash flows while the mortgage is being paid down. Eventually, these cash flows will become passive income.
• Tax Benefits: Vary by region. Here is a list of Canada’s rental property tax benefits: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/completing-form-t776-statement-real-estate-rentals/rental-expenses-you-deduct.html

Conclusion

Diversify your portfolio and don’t put all your eggs in one basket. Stocks, bonds, pensions, RRSPs, etc. are all great investments, why not add rental properties to the mix? Play the long-run, and as they say in investment banking, “hold and wait.” Be strategic. Consider long-term and think smarter not harder.