There is no doubt that owning property can be a lucrative investment, especially in the current Toronto market. BUT like any good investment, there are upsides and downsides of investing in property. Let’s start with the good stuff;
One of the perks of investing in property is the tax benefits; certain property expenses such as property taxes, insurance, management fees, maintenance costs, utility bills, and mortgage interest can be deducted from your rental income.
Another upside is predictable returns. Unlike investments such as stocks, with rental properties you can forecast your cash flow and income with much more precision; ie. it’s generally a safer investment. You know the purchase price, you know the market rent, and you can pretty accurately estimate the majority of your expenses; repairs and maintenance, vacancy, property management fees (if you elect to use a property management company), property taxes, insurance, mortgage principal and interest.
The real estate market isn’t anywhere near as volatile as the stock market. The real estate market, particularly in Toronto/GTA, has been steadily increasing over the last few decades. Even if the market ebbs and flows, a crash is not likely in the cards and you can feel confident that your investment will turn a profit.
With owning any property you can be pretty confident that you’re going to see a great return. Owning a rental property is particularly beneficial as the income you take in from tenants will contribute towards your mortgage payments, helping you pay down your mortgage faster and give you more buying power.
Another great aspect of owning an investment property is the potential to pass it on to children or elderly parents in the future.
Now that we’ve mentioned some of the upsides of owning an investment property, let’s address some of the drawbacks.
This is a big investment. Purchasing a property requires a fairly significant downpayment, meaning that you need some initial capital going into it. Further, the more properties you own, the more recurring expenses you have; i.e maintenance and repairs, insurance, property taxes, mortgage and utilities, etc.
Another potential downside is that owning property is not a liquid asset. This means that in the event of an emergency, you will not be able to get your money out quickly. Even in a hot market it can take a few months for a sale to go through and if you don’t have the luxury of waiting for the best price/best time to sell, you may end up settling for less than your ideal price.
Many people believe owning an investment property is “passive income” however, this is not exactly true. If you decide against hiring a property management company to manage your properties, you take on the responsibilities of being a landlord. This can mean dealing with difficult tenants, non-payment (and the LTB is almost never on the side of the landlord), and spending time and energy looking for new tenants during vacancies. It is also important to keep in mind that it is possible that you may not have a tenant for weeks or maybe even months at a time, therefore you need to know that you will be able to carry that financial hit.
Maintaining multiple properties is expensive and requires a lot of upkeep, especially if you own multiple properties or a property with multiple units. There are ongoing maintenance costs that come with daily wear and tear and you should take these costs into consideration. It’s important to be financially prepared in the event that you have to renovate unexpectedly. For instance, you had a tenant who was particularly hard on the space during their time there and things need to be replaced or repaired before a new tenant can move in (ex. damaged floors, appliances, furniture, etc).
Finally, rental income is taxable and could therefore put you into a higher marginal tax rate. Although this isn’t necessarily a drawback, it might be something you want to consider before you decide to invest in property.
Our Advice
There will be times when you have an empty space, you need to make sure that you will be able to offset vacancies financially.
Prepare yourself for the difficult parts of running a rental property; no matter how well you vet potential tenants, there will be bad tenants, there will be tenants who don’t pay their rent on time (or sometimes not at all), there will be needy tenants who call all the time and demand a lot of attention, tenants that are noisy, messy, or cause damage to the unit.
Will you feel comfortable raising the rent with fair market value on a tenant that you’ve known for several years and have a good relationship with? This is a reality for landlords and it is something to consider before moving forward with an investment property.