by Geoff Kirbyson
There are few things in life as satisfying as having somebody else pay your mortgage.
Well, your second mortgage, that is.
That’s the opportunity that awaits if you have the financial resources and time to dive into an income property. For most people, that means a duplex, a condominium or a bungalow, ideally in a desirable part of town and not too far away from your own home.
There are a number of benefits to owning a second (or third!) property. The rental income over and above what’s required to pay the mortgage and taxes can be put down on your own mortgage, enabling you to pay off your own house considerably faster, or used for special expenses, such as a winter vacation or day-to-day costs, just like your employment income.
The first thing you’ve got to do, according to Frank Zappia, Realtor, is visit your bank or credit union to discuss financing the 20 per cent downpayment you’re going to need for an additional property. Once you’ve been approved, you’ll probably want to see a Realtor to discuss and visit some potential targets.
“Then your job is to rent it out, keep the building in good standing and generally keep your tenants happy,” he said.
While your tenant is paying the carrying costs on the mortgage and the utilities, the landlord is responsible for making sure the property -- not just the house but the yard and garage as well -- are reasonably kept. That means you’ll likely have some unexpected expenses throughout the year, such as fixing a leaky roof, repairing the broken fence post and forcing that family of raccoons to move off your property.
If you don’t think these things are important to do on a timely basis -- like yesterday -- maybe you’ll reconsider when your tenant finds a better-kept place and moves out, leaving you to cover the mortgage, taxes and utilities on your own.
Claude Davis, Realtor and past president of WinnipegREALTORS®, is a fan of income properties and has owned a couple of duplexes for many years.
He didn’t have a grand plan to become a real estate mogul, however. A 40-year industry veteran, he took a client to look at a house for sale early in his career. Upon finding out that the tenant was a single mom raising a child with special needs and who would likely have to move once the house sold, he called his brother and told him they were going to go into real estate together. They bought the house, enabling the mom to stay and raise her family there for the next 16 years.
Davis isn’t a Tim The Toolman-type but he does like to putter in the garden so he’ll plant new flowers in the spring and trim the hedges at his duplexes throughout the summer. For the more technical issues, he’ll defer to the experts and coordinate the boiler inspection and hire the electrician.
“Some people buy income properties because they’re very handy and do all of the maintenance themselves. They pay less and the rent pays the mortgage down and leaves a little left over for their labour,” he said.
Depending on the property and location, Zappia said it’s reasonable to expect a return of between six and 10 per cent.
“The better the location, the lower the cap rate (the cash return),” he said.
Zappia believes that real estate can make up a valuable part of your investment portfolio, complementing stocks, bonds and mutual funds.
Of course, investing in real estate is considerably different than buying Government of Canada bonds. Just as with any entrepreneurial venture, there is risk involved. You’ve got to make sure you collect rent on a monthly basis, you’ll want to sign tenants who won’t damage the place, all the while hoping that the local real estate market remains strong and keeps growing.