Rental Home vs. Market Investments
I always imagine that if I had a pet parrot, instead of a Pomeranian who has zero interest in finance, it would repeat my commonly said phrases such as, “Past performance is not indicative of future returns” or “Mind your risk” or “Cashflow management is key.” Oddly enough, clients have repeated sentences too! One I hear a LOT is, “We want to buy a rental property as an investment.”
You have some money set aside – that is great! In today’s economy, with the high cost of living, it’s wonderful that you can say this. Making a wise decision with the money may be harder than it was to save it; so many things need to be taken into consideration.
This blog post isn’t to deter people from purchasing rental investments, thus annoying my many realtor friends and followers. It is to point out some very key differences between real estate investing and market investing that are often forgotten when a juicy property comes up for grabs, and you have both the cash flow and debt capacity to take advantage of it!
Let’s look at the pros of real estate as an asset class. It’s tangible, you can drive by and touch it, if you want (if you own Costco shares, you could drive by Costco too, but you get my drift). You’ll have steady cash flow from the rent (assuming you have good renters that pay you on time). You can, at some point, likely borrow against it to amplify returns (if you have capacity). If you claim the rental income, you can have some tax advantages such as deductible expenses, mortgage interest and depreciation (remember how we always say to talk to your accountant about that?). Your long-term growth value is large.
There are some cons. High upfront costs like a down payment, closing costs and potential repairs, to start with. You can’t call up your realtor for a sale as quickly as you can call us (depending on the realtor, I guess). You risk vacancies or bad tenants that leave your property damaged. Hopefully, you’ve never had to deal with the Residential Tenancy Branch as a landlord, but if you have, you’ll understand where I’m coming from. Speaking of bad tenants and vacancies, can you make the mortgage payment from your cash flow if your property is empty for six months? You have no control over costs such as property tax, maintenance, insurance and interest rates on the debt you’ve taken out to finance the property.
Here on my blog, I spend most of my time talking about the high value of investing in the markets, so I’ll spare you the pros and cons of market investments. I will leave you with this – if you want real estate or real estate debt exposure, we likely have an option for you that can compliment other work you’re doing with us.
As with everything else, it’s buyer beware. I trust you are working with a realtor you trust (this is no time to DIY) and a mortgage broker you trust (feel free to look them up!). As always, we are here for you to bounce ideas off of and provide a sounding board. To a good financial future!