In this post, I look at investing in rental property. With daily warnings on Canada’s red-hot real estate market, it may come as a surprise to some of you that I’ve taken the plunge and purchased my first investment property: a duplex.
Despite frothiness in the housing market, there are still deals and opportunities to be found for those who do their homework. In keeping with my plan to create as much passive income as possible, I hired a competent property manager to run my rental property. This, of course, cuts into my profit but saves me lots of time, which in turn allows me to search out my next investment deal.
My rental property investment was not the result of some impulsive desire to invest in something, or some naive HGTV inspired move because “houses are always great investments.” No. This purchase was the result of about a month of intense research into rental properties, taxes, realtors, property markets, property managers, and countless hours spent running numbers. That’s the kind of intense, up-front work that needs to be done to create a passive or semi-passive stream of investment income.
I can’t stress enough to anyone who is considering an investment in a rental property to do your research first…before buying, and consider every conceivable scenario and how you would react to them all. If you plan for the worst-case scenario, then you have your downside risk covered. Never buy property without having the full picture of what you’re getting into.
So now that I bought a rental property does this mean that my financial strategy and investing approach has changed? Well, not really. I think this investment property will integrate seamlessly with my other investments and will add several hundred dollars to my monthly passive income. I don’t plan on selling any of my financial assets to acquire the property and I will continue to save and invest my money in high quality dividend-paying companies and low-cost index funds.
My plan has always been to achieve financial freedom by buying diversified income producing assets like stocks, bonds, index funds, REITs and, yes, even rental properties. I feel like, after having built up hundreds of thousands of dollars in financial, paper assets, now is a good time to add a rental property to my investment mix.
There’s lots of reasons why I made the move on investing in rental property but the main reason is Leverage to acquire an income producing asset! I typically invest money into financial assets from my personal savings which has taken a big hit this year with our new home, renovations and a new baby. Unfortunately, we used our HELOC to fund the renovation work so I can’t draw on those funds as normally would to “borrow to invest.” While I still pay myself first, any extra funds are going to pay off the HELOC so I can draw on it once again to buy some great dividend paying stocks.
Saving and investing is a tried and true long term strategy for achieving financial independence. But I’ve added a rental property into the mix as part of my overall long term investment strategy in the hopes that it will help accelerate my plan to retire early and be financially free.
I have almost 300k in financial assets that pay around 8k/year in passive investment income. With the right rental property, I can get 5k or more each year in rental income plus a few grand in equity for a lot less invested thanks to the power of leverage.
Leverage is simply borrowed money and while it can lead to huge upside, it can also backfire and result in huge losses. It is OPM (other people’s money) and when people buy real estate it is almost always financed in this way through a mortgage.
So basically, money is tight this year and I’m trying to get the most bang for my buck. By investing in rental property, I can borrow money to buy an income producing asset where tenants pay the mortgage and I get a little bit of extra cash flow. There’s also lots of tax benefits to owning investment property but that is a topic for another post altogether.
If you’re interested in buying a rental property and becoming a landlord then I highly recommend picking up a copy of Douglas Gray’s The Canadian Landlord’s Guide
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Photo Credit: Photo by Stuart Miles / FreeDigitalPhotos.net