It is often said that real estate is one of the few investments that only moves in one direction: up. It is very rare in Canada for real estate to not at least ascend in value in line with inflation, guarding the investor’s capital and providing them with a solvent asset from which to generate rent revenue or sell in the future to produce retirement income. Real estate values tend to rise an average 4.9 per cent every year.
Over the last years, however, Canadian real estate value has tended to ascend even in line with stock market returns, holding at more than eight per cent per annum over the last decade. These rates are expected to decline over coming years, giving the market time to correct, meaning a prime time to purchase that second revenue property could be approaching.
Generally second home purchasers are aiming to achieve one of four objectives: the purchase of a secondary property from which to earn rental income; the purchase of a larger home to facilitate their growing family needs, leaving the primary residence open for renting; a vacation getaway; or providing a residence for children moving away for post-secondary education.
To maximize the potential of your second home, real estate experts strongly advise taking the following recommendations into consideration:
- Have the home properly inspected. You’ve been through this process before. Even if you are not intending to live in this residence, don’t cut corners or be blinded by cosmetic niceties. Ensure the home is structurally sound, located in a desirable area, and that the price tag is in line with current market analysis.
- Ensure the financing attained to secure your second property is separate from any financing secured on your first home. Second mortgages can create several tax breaks including mortgage interest, property maintenance expenses, and any depreciation that might occur in the property value. Discuss these elements in depth with your financial adviser.
- Consider taking out a life insurance policy to mitigate capital gains taxes that will amass as your second property rises in value. Be sure that any property you use as a rental property is professionally appraised so that an accurate market value is available from which to determine its gains or depreciations.
- Do you have the time and wherewithal to be the landlord of your rental property? Or will it be more advantageous for you to hire a reputable management company to fulfill the tasks of finding tenants, securing their contracts, collecting rents, and handling repairs for you? Do your research and be sure you are prepared to tackle the role of landlord or to pass it on to someone who will aptly enact it on your behalf.
- In time, make fixes and improvements to the property that will increase its value for the day you decide to resell, or increase its rent potential. Remember that a property usually requires several years over which to appreciate before a considerable profit can be made in its resale.
If during a market slowdown you find yourself hankering to move but don’t want to lose on your property, consider turning your primary residence into a rental unit. Also keep fixer uppers in mind. With a cash improvements mortgage and some hard work, you could turn an inexpensive property into a profitable resale later down the road.
This article was provided by CanEquity.com