I’ve dealt with a lot of rental properties as both an owner and a mortgage broker in Edmonton. Rental properties can be a great investment and secondary source of income for a lot of people.
But what I’ve found is that many people don’t know how to either start into the rental market or take the greatest advantage of their rental properties.
#1: Turn Your Owner-Occupied Into a Rental Property
This is a great option if you have a starter home and you’re wanting an extra stream of income or homeowners often seek out this option if their house hasn’t been selling yet, there’s a demand for rentals out there.
Homeowners also look at this if, by the time they sell their house, pay the realtor fees, pay off the mortgage, pay off the mortgage penalty, there isn’t much equity or they are in a negative equity, they can look at turning it into a rental property until it makes sense for them to sell it.
When turning owner-occupied homes into a rental, you don’t necessarily need a lease agreement. An appraiser can do what’s called the Fair Market Rent Letter. And they compare your house, number of bedrooms, location, with other homes in the area and what the rental income is for that.
So we can use that Fair Market Rent Letter to use that income to offset your liabilities of any mortgage payments and property tax payments.
#2: Report Income from Rental Properties on Your Taxes
Do you own a rental property (or multiple properties) and are collecting rental income from it? Report it on your taxes! I know that many people don’t like to because it pushes them up a higher tax bracket or they don’t want to pay taxes. But it is so important to report it!
In order to use any rental income on your future purchases, we need to see that on your taxes, even if it’s showing a loss or even a surplus. Each lender is a little different with how we can use this income, but the key thing is that to use that income, they have to see it on your taxes.
#3: Factor in Cash Flow When Buying a Rental Property
One mistake I see a lot of people make when buying a rental property to start their investment portfolio is that they don’t plan enough cash flow to cover maintenance and vacancy. A good rule is to save 15% of your rent payment (10% if it’s a condo), to go toward covering maintenance and when the property is vacant.
It’s also a good idea to price your rent at the qualifying rate, which is currently 5.25%, instead of the actual rate, which is closer to 2.5%. This is going to ensure you’re going to cash flow enough on the property to cover the mortgage payment and any additional expenses.
#4: Maximize Your Interest Expense on Your Rental Property
With rental mortgages, you can write off the interest expense against the revenue collected on your personal income taxes. You’re unable to do that with your owner-occupied mortgage.
My suggestion is, if you have rental properties, keep pulling out the additional equity from those properties and applying that additional equity onto your owner-occupied mortgage. Ideally, you’re looking to pay off your owner-occupied mortgage first because you can write off the rental interest expense on your taxes and reduce that income amount you’re reporting there.