This is a hot topic, one that is difficult to flush out in a single page. Rental homes serve as a great investment vehicle for some people while they offer a source of frustration to other people. There are pros and cons to having them, but those who figure out the pros and learn how to manage the pitfalls tend to love them. Andrea is someone who loves rental properties and the opportunities they offer, has over fifteen years experience owning and managing them directly, and due to widespread interest in the topic she now offers several workshops a year talking about her experience with them. Make sure you check out upcoming workshop schedule if this is of interest.
To have a quick read on this topic, simply read this awesome excerpt from homeownership.ca:
Scott McGillivray, host of HGTV’s Income Property, recently held an educational session in Guelph, Ontario where he discussed the topic of creating wealth through real estate. Scott actually purchased his first income property with a friend in college with his student loan – while not the best of ideas, he figured his $6000 annual rent expense made more financial sense to contribute towards a down payment. The result was just the start of his success and he purchased a second home a year later, this time using the built equity in their first home to finance the down payment. Within 2 years they owned 6 other properties. For those in attendance, he outlined how you too can create wealth with an income property.
How to Invest
A key factor in supplementing your income with real estate is to find a property that meets one major requirement – positive cash flow. When you purchase an income property, you need to do some simple math to determine the financial viability of purchasing it. If the monthly mortgage payment on a property is $1500 and most of the other costs are borne by the renter, ideally, you want it to be able to bring in at least $1600 a month in rent. In Scott’s case, he looks for opportunities where the rent is closer to $2400, thus creating $900 in positive cash flow per month. Another tip that Scott suggests is to speak to your bank about doing an interest rate adjustment – which will delay your mortgage payments due date by 5-6 days, giving you time for the rent payments to clear.
Four Ways to Make Money in an Income Property
Scott outlined four ways in which you can make money from an income property. While most people only consider the rent, three additional ways need to be considered before purchasing the property. The creation of wealth requires careful planning and consideration, while making money in many different ways.
- Positive Cash Flow – As previously discussed, you want the rent to pay for more than the cost of the mortgage .
- Principle Recapture – With the tenants covering the cost of the home, you will recapture your principal investment.
- Forced Appreciation – Investing in the home through upgrades and renovations is a great way to increase the value of the home. Home flippers live exclusively in this area, but for income property hunters, this is just another way to gain wealth.
- Market Growth – Real estate is an investment that grows in value over the years. While markets go up and down, in the long run a real estate investment has shown to grow in value.
How to Get Started
For those interested in purchasing an income property, there are three keys to success that most investors ignore. These three steps are Information, Education and Implementation. Information requires that you get the basic information on the market, along with the opportunities and challenges that may come up. Education means researching, learning and gaining the skills necessary to succeed in the income property world. In Scott’s case, he ended up becoming a licensed contractor, which allowed him to make more money by doing the work himself as well as build the right team of contractors and other skilled tradespeople around him. Finally, Implementation is where you take action and follow your income property business plan towards the path to success.
If you are considering investing in an income property, you have taken the first step to creating wealth long term. While you may see a financial payoff very rapidly, you might also run into problems, make costly financial mistakes and learn things the hard way. Scott suggests, “Creating wealth is all about delayed gratification”, while Scott owned dozens of properties, for 9 years he was living in a basement apartment of one of his units. In the short term, living frugally is crucial to creating a wealthy life within a decade.