Show Transcript
Whether it’s a part-time vacation home or a college-town condo, an investment property can be a popular method to generate extra income. It can be a big responsibility that comes with risks too. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to talk about ways you can make the most of your property investment.
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* So are you looking to generate extra income? An investment property is one option. And it can be a good way to invest for the long term. But it's also a big responsibility. There are tax implications to be aware of, changing policies, and turning a profit isn't always guaranteed.
- Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now with all the things to think about. Nicole, always a pleasure. Great topic. Love that you brought this one up. Let's start with-- for someone who is thinking of an investment property, what are some of the benefits? Why would you want to do it?
* Well, certainly the historical reason for doing it is wealth building. So the opportunity for potentially long-term gains, as well as allowing for that monthly cash flow income coming in, is great. We are seeing more and more people purchasing these properties for their children when their children are going to post-secondary education rather than fighting the battles of looking for student housing. This is an alternative where the child stays there during school, perhaps renting out rooms to friends or roommates, and then subsequently, after the child's completed their studies, it becomes a rental property.
- And we're also seeing people look at this as an alternative for downsizing, so purchasing a property now with a mind to eventually selling your existing personal residence and relocating into that rental property sometime in the future when their lifestyle needs have changed. So a lot of different reasons for doing this, but a lot to be thinking about as well.
* OK, lots of potential upside if you're smart about this. What are some of the challenges that come with this?
* I mean, the big challenge is just the cost of getting into the market. It is expensive, and competition is fierce. So really making sure that you're understanding what you're taking on financially is important. Changing interest rates, being mindful that that could potentially change the overall benefit of this for you. We've talked-- you mentioned the changing laws. So there's changing rules about being able to deduct your short-term rental expenses against income, which would certainly change the calculation.
- Bad tenants is a risk. So if you have somebody in who's either not paying the rent or potentially damaging the property and maybe not moving, you need to prepare for that. It's always an option. And of course, there's the potential for a money pit. So there is no guarantee on return of investment here. You could get one of these properties that you're just constantly sinking money into, and you're not ever going to see those long-term gains or even the monthly income flow either. So two different things to be thinking about, both legal and financial.
* Yeah. And those legal ones, of course, have been grabbing headlines. It's a great call-out, Nicole, just with the Airbnbs and some jurisdictions wanting them, others not, and what that means for people who even bought properties with that idea. And--
* And, again, there's an issue there that doesn't necessarily hit the radar. You might think you're safe. But if your tenant were to sublease or sublet for less than that 90-day rule of what applies to a short-term rental, you could potentially be on the hook for them as well. So being mindful, making sure that your legal ducks are in order and that your lease is up to date and accurate to potentially deal with those situations is really important.
* Excellent point. OK, you've got a list here people can think about in terms of ways to get more out of their investment property. We're going to bring it up and show people, but take us through it.
* Well, so location, location, location, of course, making sure that the property that you're purchasing is attractive to potential renters, either, perhaps, it's near a transportation hub, or if students are your ideal, you'll want to make sure that you're close to a secondary, post-secondary education institution. The type of property that you're looking at-- do you want a condo with potentially maintenance fees or a home where the maintenance fees are coming out a little bit differently?
- Doing a thorough cash flow analysis, making sure that you have considered all of those potential expenses, and the type of financing that might be appropriate for you, whether that's a conventional mortgage, or a HELOC, or some other sort of ... funding it from your other investments.
- Making sure that you vet your renters very, very carefully, that you make decisions about who's going to be in that property with an eye to the long term. Some people here take a lower rental amount in order to get that ideal tenant, but you need to have a legal lease agreement binding the terms that you're both obligated to each other so that things don't go offside.
- Planning for potential upgrades as well. So even though you have the cash flow now, with every property, there's going to be long-term needs. So perhaps you need to plan for those renovations or appliance upgrades. And then setting a rental price that really is reflective, truly, of the cost to you and the value of that property that takes into consideration both current needs but, as well, funding any of those long-term renovations or maintenance requirements.
* This is a great question, I think-- and, again, I know that you've put together as well too-- but when does it make sense to say, OK, I'm going to save some money? I'm going to manage this property myself. I'm going to take care of things. Or no, I'm not. I'm going to pay someone to do that for me. And, obviously, there's a cost to that. What are the things you should be thinking about?
* Well, I'm tempted to say that with age and experience, you're more likely to hire a company to do this for you. There's a lot that goes into it. So the time commitment, not only of communicating with your tenants on a regular basis, but also if there are renovations that need to be done, maintenance requirements. You need to source the materials, source the people who will be doing that, perhaps take time off work and oversee that sort of thing. Big implications on your flexibility, your lifestyle.
- Are you a big traveler? Do you like to be out of town? Is your rental property, perhaps, in a different community than you? You are tied to it if there are any of these 24-hour emergencies that might be happening. You also want to think about the cost involved and be really clear about the opportunity cost of that money but also the cost of doing things incorrectly, either from a repair perspective or from a legal perspective and having that come back to bite you.
- And then, frankly, just having a buffer between you and the other individual so that you're not having emotions involved. You have experts who know what the laws are, who know how to engage and interact in these sorts of situations. And so that buffer can provide tremendous value to those who don't want to be engaged in those interpersonal relationships with what they're regarding as an investment.
* I've got about a minute, Nicole, but this is an important one-- taxes. What do we need to think about?
* Oh, gosh. Well, so there's different types of tax implications depending on the type of property. So firstly, the types of expenses. You can have short-term expenses that are really-- this is the difference between a current expense and a capital expense. So a current expense is something like minor repairs that are being done, perhaps vehicle expenses, advertising, that sort of thing. That can be deducted against your income, your rental income.
- What can't be is these longer-term investments, so things that make improvements to the property. That can only be depreciated over time. So you need to be aware of what those differences are. Again, those new rules regarding the expenses and your ability to write them off, know what they are. Know what the rules are.
- And depending on the type of thing-- so if you are providing extra meals or a cleaning service, you may actually be converting what is a rental property into a business and have business income, business property. Totally different rules, different reporting requirements. But a big one is to factor in the cost of when you dispose of this property-- so whether you're selling it or upon your death, and have a deemed disposition, or if there's a change of use.
- So for those who purchased it, for example, to rent and then plan to use it as a principal residence later on, that change of use will trigger a tax event. And you will have income included in your income in that year that needs to be-- that's subject to tax. And you have to have liquidity to pay that tax bill. So both current and future tax liabilities to be aware of here.
* And I'm expecting that if this is something somebody is expecting or wants to delve into, they should talk to a few people to figure out how it all fits into their own plan.
* Gather your team. So gather your accountant, who can help you with that cash flow and your financing considerations, together with your banker, who can look at the different financing arrangements. Also, engage your lawyer. So this is making sure that your lease agreement is a legally binding agreement.
- You can put whatever terms you like in there, but if they're not legally binding, you may find yourself in a really uncomfortable, unfortunate situation where you have a tenant in your property, you don't have a lease that's dictating that they leave or get out, and it's otherwise a breakdown in the relationship where the entire purpose of your investment has kind of gone out the window.
- And, of course, you're working with, potentially, that professional management company as well, understanding what they do and do not offer and what those different costs are. And hopefully together, your team of advisors can let you know whether this is a viable investment for you in your circumstances.
* Well, you've armed everybody watching with great things to think about to start that conversation. Nicole, always a pleasure. Thanks so much.
* Oh, my pleasure.
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- Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now with all the things to think about. Nicole, always a pleasure. Great topic. Love that you brought this one up. Let's start with-- for someone who is thinking of an investment property, what are some of the benefits? Why would you want to do it?
* Well, certainly the historical reason for doing it is wealth building. So the opportunity for potentially long-term gains, as well as allowing for that monthly cash flow income coming in, is great. We are seeing more and more people purchasing these properties for their children when their children are going to post-secondary education rather than fighting the battles of looking for student housing. This is an alternative where the child stays there during school, perhaps renting out rooms to friends or roommates, and then subsequently, after the child's completed their studies, it becomes a rental property.
- And we're also seeing people look at this as an alternative for downsizing, so purchasing a property now with a mind to eventually selling your existing personal residence and relocating into that rental property sometime in the future when their lifestyle needs have changed. So a lot of different reasons for doing this, but a lot to be thinking about as well.
* OK, lots of potential upside if you're smart about this. What are some of the challenges that come with this?
* I mean, the big challenge is just the cost of getting into the market. It is expensive, and competition is fierce. So really making sure that you're understanding what you're taking on financially is important. Changing interest rates, being mindful that that could potentially change the overall benefit of this for you. We've talked-- you mentioned the changing laws. So there's changing rules about being able to deduct your short-term rental expenses against income, which would certainly change the calculation.
- Bad tenants is a risk. So if you have somebody in who's either not paying the rent or potentially damaging the property and maybe not moving, you need to prepare for that. It's always an option. And of course, there's the potential for a money pit. So there is no guarantee on return of investment here. You could get one of these properties that you're just constantly sinking money into, and you're not ever going to see those long-term gains or even the monthly income flow either. So two different things to be thinking about, both legal and financial.
* Yeah. And those legal ones, of course, have been grabbing headlines. It's a great call-out, Nicole, just with the Airbnbs and some jurisdictions wanting them, others not, and what that means for people who even bought properties with that idea. And--
* And, again, there's an issue there that doesn't necessarily hit the radar. You might think you're safe. But if your tenant were to sublease or sublet for less than that 90-day rule of what applies to a short-term rental, you could potentially be on the hook for them as well. So being mindful, making sure that your legal ducks are in order and that your lease is up to date and accurate to potentially deal with those situations is really important.
* Excellent point. OK, you've got a list here people can think about in terms of ways to get more out of their investment property. We're going to bring it up and show people, but take us through it.
* Well, so location, location, location, of course, making sure that the property that you're purchasing is attractive to potential renters, either, perhaps, it's near a transportation hub, or if students are your ideal, you'll want to make sure that you're close to a secondary, post-secondary education institution. The type of property that you're looking at-- do you want a condo with potentially maintenance fees or a home where the maintenance fees are coming out a little bit differently?
- Doing a thorough cash flow analysis, making sure that you have considered all of those potential expenses, and the type of financing that might be appropriate for you, whether that's a conventional mortgage, or a HELOC, or some other sort of ... funding it from your other investments.
- Making sure that you vet your renters very, very carefully, that you make decisions about who's going to be in that property with an eye to the long term. Some people here take a lower rental amount in order to get that ideal tenant, but you need to have a legal lease agreement binding the terms that you're both obligated to each other so that things don't go offside.
- Planning for potential upgrades as well. So even though you have the cash flow now, with every property, there's going to be long-term needs. So perhaps you need to plan for those renovations or appliance upgrades. And then setting a rental price that really is reflective, truly, of the cost to you and the value of that property that takes into consideration both current needs but, as well, funding any of those long-term renovations or maintenance requirements.
* This is a great question, I think-- and, again, I know that you've put together as well too-- but when does it make sense to say, OK, I'm going to save some money? I'm going to manage this property myself. I'm going to take care of things. Or no, I'm not. I'm going to pay someone to do that for me. And, obviously, there's a cost to that. What are the things you should be thinking about?
* Well, I'm tempted to say that with age and experience, you're more likely to hire a company to do this for you. There's a lot that goes into it. So the time commitment, not only of communicating with your tenants on a regular basis, but also if there are renovations that need to be done, maintenance requirements. You need to source the materials, source the people who will be doing that, perhaps take time off work and oversee that sort of thing. Big implications on your flexibility, your lifestyle.
- Are you a big traveler? Do you like to be out of town? Is your rental property, perhaps, in a different community than you? You are tied to it if there are any of these 24-hour emergencies that might be happening. You also want to think about the cost involved and be really clear about the opportunity cost of that money but also the cost of doing things incorrectly, either from a repair perspective or from a legal perspective and having that come back to bite you.
- And then, frankly, just having a buffer between you and the other individual so that you're not having emotions involved. You have experts who know what the laws are, who know how to engage and interact in these sorts of situations. And so that buffer can provide tremendous value to those who don't want to be engaged in those interpersonal relationships with what they're regarding as an investment.
* I've got about a minute, Nicole, but this is an important one-- taxes. What do we need to think about?
* Oh, gosh. Well, so there's different types of tax implications depending on the type of property. So firstly, the types of expenses. You can have short-term expenses that are really-- this is the difference between a current expense and a capital expense. So a current expense is something like minor repairs that are being done, perhaps vehicle expenses, advertising, that sort of thing. That can be deducted against your income, your rental income.
- What can't be is these longer-term investments, so things that make improvements to the property. That can only be depreciated over time. So you need to be aware of what those differences are. Again, those new rules regarding the expenses and your ability to write them off, know what they are. Know what the rules are.
- And depending on the type of thing-- so if you are providing extra meals or a cleaning service, you may actually be converting what is a rental property into a business and have business income, business property. Totally different rules, different reporting requirements. But a big one is to factor in the cost of when you dispose of this property-- so whether you're selling it or upon your death, and have a deemed disposition, or if there's a change of use.
- So for those who purchased it, for example, to rent and then plan to use it as a principal residence later on, that change of use will trigger a tax event. And you will have income included in your income in that year that needs to be-- that's subject to tax. And you have to have liquidity to pay that tax bill. So both current and future tax liabilities to be aware of here.
* And I'm expecting that if this is something somebody is expecting or wants to delve into, they should talk to a few people to figure out how it all fits into their own plan.
* Gather your team. So gather your accountant, who can help you with that cash flow and your financing considerations, together with your banker, who can look at the different financing arrangements. Also, engage your lawyer. So this is making sure that your lease agreement is a legally binding agreement.
- You can put whatever terms you like in there, but if they're not legally binding, you may find yourself in a really uncomfortable, unfortunate situation where you have a tenant in your property, you don't have a lease that's dictating that they leave or get out, and it's otherwise a breakdown in the relationship where the entire purpose of your investment has kind of gone out the window.
- And, of course, you're working with, potentially, that professional management company as well, understanding what they do and do not offer and what those different costs are. And hopefully together, your team of advisors can let you know whether this is a viable investment for you in your circumstances.
* Well, you've armed everybody watching with great things to think about to start that conversation. Nicole, always a pleasure. Thanks so much.
* Oh, my pleasure.
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