With more houses for sale and many homeowners conscious of their current equity position, renting out your property may make sense. We believe there are a number of factors to take into consideration when making a decision and we encourage you to take a look at the tips below to determine if this option is for you:
Who will manage the property and the tenants?
I believe this is most often overlooked by many who are considering getting into the rental market. The goal is to maximize positive monthly cash flow and the costs associated with the management and upkeep of that property are very important as they can eat up a chunk of that change! If you are a do-it-yourself kind of person that can commit to providing your tenants ongoing and timely service at 3 AM, then self-managing could save you some dough.
However, for those that prefer to sleep through the night, you might want to outsource the typical duties of a property manager. These duties include repairs, key help, rent collection and more. Most property management fees vary depending on how many units you have and the services you require. Be sure to consider this expense when determining if your property will cash flow as a rental.
Are there going to be significant tax implications?
I highly suggest consulting an accounting professional for more information on the tax implications of owning a rental property. Bad news first is your surplus rental income is taxable. Good news is most of the rental property expenses are tax deductible. Mortgage interest, property taxes and expenses incurred through renting the property can all reduce your tax bill a bit.
If you are renting your property out as a short-term plan and you may eventually sell, you need to consider capital gains. Basically, if you sell your rental property and make a profit, those surplus funds are taxable. That being said, there are some exceptions on capital gains and your accounting professional can give provide you with more details.
Perhaps you may want to inquire with your existing home owner insurance policy holder about obtaining rental property insurance coverage as they already know you. Your new tenants will only be responsible for insuring their own belongings if they wish as you will be arranging the insurance for the physical property.
Do you know how much your property costs a month?
The mortgage rate and term you have can affect the financial success of renting your home. If you have afixed rate mortgage, your monthly payments will remain the same for the length of your term. This is good as it provides a consistent benchmark figure to determine the monthly rental amount you need to charge in order to cover your monthly costs.
A variable rate mortgage could make the determination process a bit trickier as variable rate mortgage payments are subject to change. Ensure you have considered an interest rate hike when deciding what rental amount you will charge.
In addition to the mortgage payment, there are property taxes and home insurance costs to take into consideration. Ensure you are factoring a cash flow cushion into your rental amount to accommodate any type of an increase in your monthly costs. And also keep in mind when making up the rental agreement you have an option to increase the rental amount sometime in the future.
Where is the bottom line?
Location is the most prominent factor in real estate. Proximity to downtown, schools and parks as well as the condition of the property are all factors that will affect the rental amount you can charge. With favorable conditions, you can command a higher rent amount and be choosier with tenants. Keep in mind even though Alberta has the highest rental rates, you are still subject to market conditions. Make sure the rent amount you charge is comparable to similar properties in your neighborhood. If you decide to charge rent that is higher than normal for your area, you need to determine it makes economical sense to turn your owner occupied property into a rental. If you don’t know what market rent is for your area, please do not hesitate to contact us and we can align you with an appraiser who can provide you with a market rent evaluation.