Rental property investment needs a mapped out plan

20 LIFE
The Ottawa Sun n Thursday, September 4, 2014
mortgage
series
Rental property investment
needs a mapped out plan
Be aware of the risks and benefits.
“Positive
cash flow means
the money coming
in covers your
expenses
going out.”
joanne RichaRd
Special to QMi Agency
Leverage wisely,
advise experts.
“Leverage is investing
with borrowed money. It
lets you buy more of an asset
than you otherwise would
be able to, with the goal of
earning a greater return than
your cost of borrowing,”
says Robert McLister.
Leverage can magnify
both your gains and losses,
stresses McLister, founder
of ratespy.com. “Leverage
can be a double-edge sword
in the short term. But, if
used intelligently, it can be
a powerful and profitable
strategy in the long term.”
If you’re going to extract
your home’s equity to
buy an income property,
McLister stresses to ask
yourself these questions:
• If the property goes vacant
or the rent is interrupted,
how long can I pay the
mortgages, taxes and
expenses on my home and
investment property?
• Is the rental cash flow
sufficient to bank away a nice
return and keep a decent
reserve for maintenance,
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repairs and upgrades?
• Are you buying in an
area that should benefit
from employment growth
and/or above average
population gains?
• Are you buying a cheap
property to minimize your
down payment, at the risk
of incurring negative cash
flow; for example, where
your monthly income is
less than your monthly
expenses on the property?
• Are you relying on the
cash flow of one mortgaged
property to service the
expenses, for example, the
mortgage, of another property?
“This can be playing with
fire if property A’s cash flow
is interrupted and it opens
you up to a domino effect
of missed payments.”
• How much liquid assets
or credit do you have
for emergencies?
According to Rob McGavin,
managing director of Financial
Planning and Advisory
Services at Scotiabank, be
aware of the risks and benefits
of real estate investing.
“It can be a good strategy
but it has to be for the
right client,” he says.
Your cash flow has to be
mapped out so you know
Craig Twigger ~ newking.ca
that you can manage to pay
those interest payments.
“Understand how much
of what you are paying
is going to be deductible
versus not,” he adds.
Cash flow needs to be
maintained, agree experts.
“Positive cash flow means the
money coming in covers your
expenses going out and there’s
a surplus for you to ‘bank’ and
invest back into your business.
This is actually thinking and
being an investor,” says Barrie
realtor Shannon Murree.
“Treat real estate investing
as a business, do analysis
and know your numbers
in terms of market rent,
vacancy rate, property taxes,
maintenance, insurance,
condo fees (if applicable),
etc. It’s important to know
that when you’re borrowing
for the purposes of investing
— which is not applicable
to your principle residence
— that you have a better tax
position and can write off the
interest. Of course, always
check with Canada Revenue
Agency,” adds Murree, of
movingsimcoe.com.
Craig Twigger, of newking.
ca, advises to only purchase
cash flow positive property
in a top 10 towns and,
don’t speculate that it will
go up in value. “Long term
wealth is created by creating
equity, positive cash flow
and accelerated payments
will create equity.”
A good investment in a
rental property should return
in excess of 75% of your
investment in the first five
years, says Twigger. “Always
use a good real estate agent
and a tier one lender for your
mortgage… Typically if the
major banks won’t lend to you,
the deal is not good enough
and you should walk away.”
Twigger stresses that to
invest in rental property you
will need a good team of
contractors and an accountant,
to support you. “Follow the
numbers, they don’t lie.”
He adds: “Do not think you
can live off of rental income
when you first start out don’t quit your day job!”
Buckle in for the long term.
“No matter the market — real
estate or the stock market —
they go up and down,” says
McGavin, so you have to be
willing and able to manage the
ride. “If you are risk adverse
or struggle with debt, then
this may not be for you.”
ConSider A
reAdvAnCeABle MortgAge
Thinking of cashing
in on real estate?
According to Robert
McLister, the best
financing tool for
leveraged investing
is the automatically
readvanceable mortgage.
“Automatic readvancing
means that the lender
will instantly readvance
you, let you re-borrow
the mortgage principal
you’ve paid off.” McLister,
of intellimortgage.com
and ratespy.com, says that
readvanceable mortgages
give you a continually
growing line of credit,
subject to a limit of 65to 80% of your property
value. “You can use that
credit to reinvest in other
opportunities as they
arise. Or it can serve as an
emergency backup fund.”
He adds, “if you have both
a home mortgage and a
tax deductible investment
mortgage, extend the
amortization of your tax
deductible mortgage as
long as you can. You can
use that extra cash flow
to pay down your nontax-deductible mortgage
or invest in other assets.
For related reasons,
don’t get too hung up
on big prepayment
privileges with tax
deductible mortgages.”