Rental Property; Pros and Cons of buying a condo or townhouse as an investment to rent out

Have you been thinking of purchasing a condo or townhouse as an investment property?

Real estate investments are one way to realize huge gains, but this strategy should be used as a long-term plan, as it’s not a get rich quick type of strategy. The reason is: it takes time for mortgage paydown and cash flow to build up, so expect a 10 to 20-year hold on the real estate investment property. If you can pay the property down quicker, then you’ll have a mortgage-free property that is receiving monthly income and you can re-invest that money or simply add it to your bank account.

What are the benefits of parking your money in an investment property and becoming a landlord?

• For the appreciation (increase in value) of the unit over time. There may be downward dips for short periods of time in the real estate market, but if held long-term, real estate will always gain value.

• For the mortgage pay down by the tenant. You would rent your place out at the city’s current market rental rate (see my Best Cities to Invest In blog, for current monthly rental rates). That monthly rental income covers the mortgage payment each month, which pays down the principal amount of the mortgage (and covers the interest).

• For the positive cash flow each month. This is the cash left over each month after the expenses are paid. It looks like this:

Revenue   
Rental Income

Operating Expenses   
Less: Mortgage principal and interest
Property taxes
Strata
Insurance
_________________________________________
Total Operating Costs
_________________________________________
Net Income (cash flow)  

Utilities such as water and gas are usually covered in your strata payments. Heat and electricity will be set up by your tenant directly with say, BC Hydro. This means that you don’t need to factor these costs into your costs, as they are not part of your carrying costs (operating expenses).

What are the drawbacks to an investment condo/townhouse?

• Unless you bought the investment property a while ago or made a large down payment, the market rental rate most often barely covers your carrying costs. Perhaps you find a good deal and can generate a couple hundred dollars each month in positive cash flow, but often, these investments break-even each month. Remember that you are still gaining the appreciation of the property and the mortgage paydown.

A special mention to property taxes should be made. If you own a second property that you rent out, this is not considered your principal residence and you cannot claim the home owners grant for your property taxes.

• Vacancy periods. Let’s face it, if your investment property is/will be in Southern BC, the Okanagan, or parts of Vancouver Island, there are currently huge rental demands. Expect 20-60 inquiries to rent your property when you post it for rent. The reason I’m mentioning vacancy periods is because there are periods in time when move-in and move-out dates don’t line up perfectly with your tenants and you may have an empty property for a week or even a month.

• Problematic tenants are another part of becoming a landlord. You will inevitably face an issue with any of the following: complaints, late-payments, or damages. Learn your rights as a landlord and do your due diligence when selecting a tenant.

• You will also undergo the task of tracking rent payments and expenses, along with preparing and retaining rental forms, inspection reports, strata forms, etc. If you are unsure of how to file your own taxes, now that you have rental income, find a good bookkeeper and Accountant. I recommend contacting PNL Accounting Services.

You may be wondering why I have specifically wrote this blog for condos and townhouses, it’s because single family homes or duplexes have other rental income possibilities, which significantly impact the appreciation, mortgage pay down, and monthly cash flow. This topic will be covered in a future blog.

If you’re considering an investment property, contact me today, as I’d love to hear from you.