Income / Rates & Terms / Rental Properties / Variable Interest Rates

Could your home be an income property?

With more houses for sale and many homeowners conscious of their current equity position, renting out your property may make sense. Although glamorized on shows like HGTV’s ‘Income Property’, there are a number of factors to take into consideration when making the decision to rent out your home or a secondary property.

Take a look at the tips below to determine if this option is a good fit for you…

Questions you need to ask yourself

  • Who will manage the property and the tenants?

This is most often overlooked by many who are considering getting into the rental market. The goal is to maximize positive monthly cash flow. As such, the costs associated with the management and upkeep of the rental property are very important, as they can eat up a significant chunk of the rental income. If you’re a do-it-yourselfer who can commit to providing your tenants with ongoing and timely service (even at 3am!), then self-managing could save you some dough.

For those who 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 allow for positive 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: your surplus rental income is taxable. Good news: 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.

If you’re 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; your accounting professional can provide more details.

  • What kind of insurance do you need?

You may want to inquire with your existing homeowner insurance policy holder about obtaining rental property insurance coverage, since you are already an established customer. Your new tenants will only be responsible for insuring their own belongings (if they wish); you will be arranging the insurance for the physical property.

  • Do you know how much your property costs each month?

The mortgage rate and term can affect the financial success of renting your home. If you have a fixed rate mortgage, your monthly payments will remain the same for the length of your term. This is often advantageous 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 increase in your monthly costs. Also keep the following in mind when drafting the rental agreement: you should include an option to increase the rental amount at some point 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 favourable conditions, you can command a higher rent and be choosier with tenants. Keep in mind that even though your area may have high rental rates, you are still subject to market conditions. Make sure the rental amount you charge is comparable to similar properties in your neighbourhood. If you decide to charge rent that is higher than normal for your area, you need to determine if 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, contact an appraiser or real estate agent who can provide you with a market rent evaluation.

As always, if you have any questions or would like mortgage information, please do not hesitate to contact Jackie at 780-433-8412 or Stay in the loop by following on Twitter @Mortgagegirlca.

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