When to rent out your property

Read this before making the decision to become a landlord.

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by

From the Summer 2013 issue of the magazine.

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Q: We have purchased a new home and were planning to sell our current home. We are now thinking about renting it and taking some equity out to use for the down payment on our new home. Does this make sense?

—J.O., Woodstock, Ont.

A: We don’t love this strategy. While it is possible, we think it is too complex for most people to pull off effectively. Ask yourself some questions before you decide if it is right for you.

First, would this rental business be profitable? Look at how much you could realistically rent the property for, subtract the costs of the mortgage, maintenance, and property taxes and factor in the relevant tax deductions on those expenses to see if you’d be able to at least break even. You’ll need to talk to your lender to see how financing will work between the new home and the rental property to see what your interest expense will be. And be sure to factor into your math higher interest rates down the road. While you’re at it, talk to a professional tax adviser, says Evelyn Jacks, author of Jacks on Tax. You’ll want to make sure you understand the tax issues related to capital gains and the change in use of your home from your principal residence to a rental property.

Second, are you willing to do the work of a landlord? Finding tenants and catering to their needs can be a lot more effort than you might think. Third, what would your total asset mix look like? This strategy may mean most of your net worth is invested in real estate, making you more vulnerable to swings in interest rates and the housing market itself. Fourth, do you have a financial cushion in case things go bad—you lose your job, have to evict a tenant or the rental market softens? Make sure the pros are worth the cons before you move forward.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at ask@moneysense.ca.

3 comments on “When to rent out your property

  1. YOU have missed to mention the benefits of investing in RE.. how about the money leverage, appreciation, mortgage pay down and Cash flow to paint the whole picture of why renting ?

    Reply

  2. I think the point of article was to point out how hard it is and the cons of this approach. you get a bad tenant, it can takes months to evict with little recourse to collect money and/or damages; things break, do you do the repair or call the plumber?
    you need to calculate the money made against the fact now you have a MUCH bigger mortage on the 2nd place because you didn't use the capital from the first. Also, say you sell the place now that you're living, principal residence, no capital gains. you move and sell it in 5 years. you can be taxed very heavy, if you paid capital gain taxes on say 50,000. that would be a lot of rent to make up for that.

    its a very tough road.

    Reply

  3. Reality is to make money it's never easy. Owning real estate is a job. You have to treat it that way.

    Reply

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