In­vest­ing in prop­erty? Mind the pit­falls

Winnipeg Free Press - Section G - - HOMES - By Helen Mor­ris

WE all wish for a de­cent stan­dard of liv­ing in re­tire­ment. There are many ways to in­vest for re­tire­ment, but a wise in­vestor will study the pros and cons of putting funds into real es­tate.

Most peo­ple, just by liv­ing in their house and own­ing their home, have the ma­jor­ity of their money al­ready in­vested in the real es­tate mar­ket, says Scott Ward, fi­nan­cial ad­viser with Ed­ward Jones. If you’re look­ing at buy­ing a sec­ond prop­erty as an in­vest­ment... you’re not diver­si­fy­ing — es­pe­cially if you’re go­ing to rein­vest into the same mar­ket.

If you and your fi­nan­cial ad­viser de­cide you have enough di­ver­sity in your port­fo­lio to buy more real es­tate, the next step is to de­cide how in­volved you want to be in man­ag­ing your in­vest­ments.

“(These peo­ple) should cer­tainly be aware of what work is in­volved,” says Lois Volk, mort­gage bro­ker with In­vis. I get a lot of peo­ple that buy the prop­erty, and end up want­ing to get rid of it within a year or two.

Ward agrees in­vest­ing in real es­tate may not be an op­tion for the more pas­sive in­vestor.

“Own­ing a prop­erty and rent­ing it out, it’s re­ally like hav­ing an­other job,” Ward says. “It may be an in­vest­ment that gen­er­ates cash flow for you, but you are still work­ing. Hir­ing a prop­erty man­age­ment firm is an op­tion, but that will add to costs.”

Volk says fi­nanc­ing re­quire­ments have been tight­ened up for in­vestors.

“The CMHC guide­lines state they have to qual­ify based on their own in­come plus 50 per cent of the rental in­come,” Volk says. “If they have a mort­gage of their own plus the cost of the in­vest­ment prop­erty, they have to be able to carry those debts within 40 per cent of their in­come.”

New rules for in­vestors mean a min­i­mum down pay­ment of 20 per cent will be re­quired to fi­nance small (one-to four-unit) non-owner-oc­cu­pied res­i­den­tial rental prop­er­ties, up from the pre­vi­ous five per cent min­i­mum.

Volk says the most pop­u­lar types of prop­er­ties for renters, and there­fore in­vestors, are those close to pub­lic tran­sit and pop­u­lar ar­eas.

When it comes to tax­ing those re­turns, an in­vest­ment prop­erty re­ceives dif­fer­ent treat­ment from your prin­ci­pal res­i­dence.

When buy­ing an in­vest­ment prop­erty, you will need to iden­tify what per­cent­age of your pur­chase cov­ers the land, the build­ing and any fix­tures in­side the build­ing. The cost of the prop­erty can­not be de­ducted when de­ter­min­ing net rental in­come, but Canada Rev­enue Agency al­lows for the de­pre­ci­a­tion of the prop­erty over time through a cap­i­tal cost al­lowance claim. De­pre­ci­a­tion is the loss in value of an as­set — in this case your in­vest­ment prop­erty — over time, due to phys­i­cal de­te­ri­o­ra­tion and age.

The land can­not be de­pre­ci­ated, but CRA will al­low you to de­pre­ci­ate the build­ing, the fix­tures and fur­ni­ture. The CRA web­site ex­plains how much you can deduct for which type of prop­erty (­prtnr/rprtng/cptl/dprcbl-eng.html). The de­pre­ci­a­tion is treated as an ex­pense on your tax re­turn, but it would be wise to have an ac­coun­tant go over all po­ten­tial ex­pen­di­tures and de­duc­tions.

Once you have acquired it and are rent­ing it out, you need to re­port the rental in­come and then from that you can deduct any of your cash ex­penses, says My­ron Kn­odel, a tax and fi­nan­cial plan­ning ex­pert with In­vestors Group. These items in­clude any util­i­ties not paid by the ten­ant, main­te­nance costs, in­surance and taxes. In ad­di­tion to that, you are el­i­gi­ble to deduct the cap­i­tal cost al­lowance.

As with any in­vest­ment, val­ues go down as well as up.

“You re­ally need to be care­ful about stretch­ing your­self too far (bor­row­ing against the in­vest­ment prop­erty) be­cause in­ter­est rates go up, and the next thing you know, you can’t carry the cost and you’re forced to sell at a loss,” Ward says. “The real es­tate mar­ket doesn’t al­ways go up — as 2008 showed us. In­ter­est rates go up, prop­erty val­ues go down, and you could be at the bad end of a bad in­vest­ment.”

— Canwest News Ser­vice

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