One of the most important calculations anyone should make while deciding whether to rent out a home or condo is the return they’re likely to get on that investment.
It’s an equation that needs to take many factors into account, from the larger economic picture that will tell you whether people will be moving into your area and want to rent your property, to cash flow, appreciation and the amount of time you want to spend caring for the rental unit, said Jennifer Hunt, Vice President Research and Events with the Real Estate Investment Network of Canada, or REIN.
“It’s very important to be able to assess properties,” said Hunt, whose association teaches investors everything from analyzing a property’s value to how to interview a property manager.
Investors will often focus on cash flow, or the amount of money they would make off the rent. That’s a fairly straightforward calculation that deducts the rental income you get from all your expenses, such as repairs, property taxes, insurance and utilities, as well as your mortgage.
But to Hunt, that’s just the appetizer. If you look at real estate as a five-course meal, she says, the entrée is the mortgage principal buy down, or how much principal of your mortgage was paid annually.
“It builds up equity, it’s silent, it’s hidden – it’s kind of like a forced savings plan,” she said.
“Over a typical 25 years amortization, the amount of equity that’s produced in terms of the return on investment is significant.”
The appreciation is also important, since that tells you how much your property has gone up in value since you bought it, but so is forced appreciation, or the dessert in REIN’s meal analogy.
That’s the extra value you get out of your property by making improvements that either increase the cash flow or decrease costs, such as installing new windows or smart meters.
But experts also say you need to consider more than the numbers.
“It isn’t as cut and dry as looking at the return, because the return doesn’t factor in the stress levels involved with the day to day, so that’s where someone needs to make more of a personal decision about (their) strategy,” said Brenda Burjaw, director of commercial services at Meridian Credit Union Limited.
“It’s a matter of do you have the time capacity, the energy capacity and the risk tolerance to work with a tangible investment.”
That could include dealing with tenants, maintenance, repairs and the overall risk that comes with owning a property that may fall in value or bring unexpected costs.
“You may get a much bigger bang for your buck shorter term with commercial real estate (than with the stock market), but it’s a much higher risk to get that reward,” Burjaw said.
Those wishing to take a more passive approach can hire a property manager, who will take care of the unit and deal with repairs, for a fee of between six and 12 per cent.
It often doesn’t make sense to bring in a property manager unless you have more than one property, live far away, or are too busy to deal with issues in a timely fashion, but some people find the peace of mind is worth the price.
And while the property manager will find tenants and deal with repairs and maintenance, you still have to manage the property manger to make sure they’re paying you on time, collecting the rent and treating your tenants with respect, said Hunt.
If you’re having trouble making money off the property you could look at reducing expenses, putting in strategic upgrades that can get you a higher rent, or even selling the property.
But those who are able to hang on to it long term will get to the end of REIN’s five-course meal: the espresso.
That’s when, after the 25 years, your principal is paid off, and the investment property becomes like an annuity that provides you ongoing income on a regular basis, said Hunt.
“It is now what’s called ‘clear title’ (and) a big bulk of what was going to the bank for your mortgage payment … now comes to you,” she said.
“That becomes a fairly significant retirement plan.”
