With only a few setbacks, the price of real estate in Ontario has increased steadily for the past 50 years. As a homeowner, you may have benefited from this trend. If you’ve got equity in your home, you may be thinking about purchasing a second property as an investment. It can be a great way to earn extra income while diversifying your portfolio, especially while there is inventory on the market.
What is an investment property?
An investment property is a condo, townhome, or house you purchase, not as a place to live, but as a short or long-term investment. While market variables can make it difficult to predict the amount of money you’ll make or lose, many investors consider real estate a worthwhile asset. Let’s look at some pros and cons of real estate investing.
Pros and cons of buying investment property
Pro: Diversifies your investment portfolio
A diversified portfolio that includes alternative asset classes such as real estate, mitigates the risk of having all your investments in one basket, like the stock market.
Con: Comes with a high up-front cost
Investment real estate requires a minimum down payment, typically based on the value of the property, plus legal and closing costs, just to get started. The costs can add up if the property needs repairs or renovation, or you have a problem tenant. When you do the math, it might not be as profitable as you think.
Pro: Generates income
Rental income can be a steady, predictable source of revenue that doesn’t fluctuate like interest rates, bond yields, or corporate dividends. In Ontario, property owners can increase rent each year, within provincial guidelines.
Con: Decreases your liquidity
Liquidity refers to how quickly you can sell an asset and turn it into cash. Real estate takes time and money to sell. If you are forced to liquidate a real estate investment when the market is down, you could lose money.
Pro: Will likely increase in value over time
When you buy an investment property, you don’t have to pay for it all at once. You cover the down payment and finance the rest, but rental income should cover the cost of ownership. Once you pay off the mortgage on an investment property, the monthly income (minus the cost of upkeep and taxes) could be substantial. In addition, the market value of the property will likely increase over time.
Con: Requires time and effort
Managing a property can be demanding. Between maintaining the property and its records, finding and supporting tenants, it may require more time than you expect. You may want to consider hiring a property management company to help you service and support your investment property.
Is an investment property right for you or should you consider something else?
If you’re thinking of purchasing a second property, a Meridian mortgage specialist can help you review your options, run the numbers and determine if it makes sense as part of your financial plan.
However, if you don’t currently have a financial plan or are looking for a second opinion, a Meridian Financial Planner can work with you to choose the right investments that will help you reach your goals.