RENTAL PROPERTY OWNERSHIP
Last updated 28 August 2020
Call us for an appointment!
I decided to blog today about Rental Properties as I have had three calls this week about rental properties and what they should do with them, including how to start; how to exchange and how to sell if desired.
Rental properties provide many tax advantages for the owner. However, before any of these advantages are considered, it is very important for you as a landlord (present or future) run the numbers and ensure that it makes sense for your circumstances.
1. PASSIVE INCOME SOURCE
This is one of the biggest benefits to owning rental properties. Rentals create recurring income for which there is relatively little effort to maintain outside of finding rentors and regular maintenance and repairs. It is an attractive to many since it may be taxed differently, is a side hustle to have some extra income and for many it is providing financial security during retirement.
We, ourselves, have three student apartments. We also have a couple of SFH. All of them have faired well but we offered our students a chance to split their April and May rents out over a period of months because they were working less. A simple offer like this goes a long way to retain the rentors and as a prepared landlord we could handle the decrease in rents. You need to be prepared as a landlord for different scenarios and should have roughly 3 months worth of expenses put away to handle situations like this.
- PROPERTY VALUES TEND TO INCREASE
Like any investment there are risks, but over the years property values increase over time. As the value increases your equity in the property is greater. The increased value in the property gives you the option to sell the property when the timing is right or as the need arises. Remember that each market is differnet.
As you look at properties to buy and rent out you need to know the locations dynamics. This is one of the biggest benefits to owning rental properties.
- DIVERSIFICATION IN YOUR PORTFOLIO
The old saying about not having all your eggs in one basket is very true. The stock market is great but if all your money is in the stock market you are at the mercy of boards of directors for businesses and sometimes there is short sightedness. By having rentals, your portfolio is then diversified and you don't have to rely on the bulls or bears in the market.
- HOME OPTIONS FOR THE LANDLORD
By having a rental, if you run into problems with cash flow, through a loss of a job or medical issues or any other number of issues, you could sell the house you are living in and move into the rental or you could sell your rental. It provides a security blanket when financial times are tough.
How to choose a rental? What makes a rental attractive?
There are many items that make a rental attractive. As they say in Real Estate "Location, Location, Location." Know your location and the surrounding area.
- Is there appropriate parking?
- Are there stores close by for the basic needs?
- Is there adequate parking? Is there good public transport?
- Are the utiltiies reasonable?
- What is the trade off for the rentors (ownership costs vs renting)?
All of these items need to be evaluated when considering a rental.
How do you become a landlord?
There are various ways a person comes about being a landlord.
- By personal choice (buying a rental or moving from your own home and turning that into a rental)
- By inheritance
- By luck
Regarldess of how you become a landlord you need to ensure you have thought about all these items.
The stock market is great but if all your money is in the stock market you are at the mercy of boards of directors for businesses and sometimes there is short sightedness. By having rentals, your portfolio is then diversified and you don't have to rely on the bulls or bears in the market.
How do rentals affect your taxes?
Depending on your involvement with the rentals there is great tax break for those owning rentals. All of the expenses related to the rental are written off against the rental income. These include the mortgage interest, repairs, insurance and maintenance.
In additon to this, the Government allows you to take the depreciation of the property as a loss. Depreciation potentially lessen your tax burden without costing you any money at all. Depreciation is a paper loss. Not a physcial loss. Depreciation is calculated based on the value of the building (not the land) divided by 27.5 years. You then get this amount as a deduction against the income for the property.
A word of caution...when you sell the rental, the depreciation comes back to you as income. For this reason, we advise our clients that ONCE you are in the Rental Business....you stay in the Rental Business.
When selling your rental, you must discuss with your tax proffesional about whether you should sell it or do a 1031X (Exchange) which allows you to continue to be a landlord.