Earning an income on property is a time-tested and appealing way to generate wealth. However, earning an income doesn’t necessarily qualify as a good investment. Whether you’re taking into consideration your personal circumstances or access to finance, the long term intentions for the property, or the restrictions and stipulations of B.C. Tenancy Law, there are a number of key considerations when it comes to deciding whether renting out a property is a good investment.
What Makes a Good Investment?
Before we can determine whether renting out a property is a good investment, we need to look at investing in general. Whilst most people understand the tangibility of property investing, it is only one of many assets that you can invest in. Other assets include:
Bonds (both corporate debt issuance and government bonds)
Commercial Property (office space, warehouses)
In all cases, choosing to invest in an asset class is about using your money to greater effect, either to increase your asset holdings or generate positive cash flow. Where stocks and bonds may return a % yield, property investing can generate income in the form of rent, and/or a capital appreciation on the property you purchase.
For most people, property investing is the go-to choice, as you are granted ownership over something physical, and will still own the asset even if the property isn’t rented. As to whether it’s a good investment to rent out your property though- you’ll need to start by establishing your investment strategy.
What Is Your Investment Strategy?
There are a number of key questions to ask when considering purchasing or renting a property for yield. Aside from the obvious income generation, these primarily revolve around why you looking to purchase/rent a property. These include:
Is it to live in at a later stage, or is it purely to generate income?
Will the property run cash positive, or is a negative cashflow better for tax purposes?
Is it still cash positive with expenses taken into account?
Am I aiming purely for yield/return on investment, or also for property appreciation?
How long do I intend to keep the property?
Can I afford long periods of vacancy, or do I have a mitigation strategy for them?
Is this my only investment/income stream? Can I cover losses or make up the difference if I need to?
Am I aware of the B.C. tenancy laws?
Have I considered the strata body restrictions, which could affect the rental of the property?
Purchasing property (regardless of the intent) is one of the largest financial decisions we can make. However it is also one of the most emotional, and that can often act in detriment of good property investment. That is, people tend to purchase a property they like, rather than one that is going to see the greatest return.
That’s why it’s important to establish early what your intentions are with the property. If you’re looking to generate some short-term income, and move into the property later, you may choose to purchase something you can see yourself living in too. If you’re aiming purely for yield, perhaps the location of that property becomes less important. If you’re dividing your current property into separate rentable flats, you need to determine if the rental yield is enough to justify the division and on-going relationships with tenants. At The West Haven Group, we are more than happy to run through some of these considerations with you, to determine whether property investment is the right choice for you.
How Do B.C. Tenancy Laws Affect My Rental Property?
If you decide to become a landlord in B.C., your property will be governed by the Residential Tenancy Act and B.C. Tenancy Law. Strata bodies can also impose restrictions on the use of your condo or other strata-titled property.
Understanding how this legislation can and will affect your property can become a key consideration when deciding if renting it out is a good investment. These restrictions can also affect your personal circumstances and intentions, especially if you plan to move into the property at a later date or purchase one that is already occupied by tenants.
Generally speaking, the landlord-tenant relationship is easily managed and monitored, be it in person or through an agent. However, in cases of dispute, B.C. tenancy laws lean heavily in favour of the tenant. For example, there are rules for landlords when it comes to:
Rent increases (you can only increase rent once every 12 months, and it is based on the inflation rate, not one of your choosing)
Access to the property
Notice to vacate
Changes to the terms of the tenancy (can only occur if both parties agree to it)
Ending a tenancy
End of lease agreements. After the agreed rental term the lease moves to a month-to-month contract, which is also governed by the same tenancy rules and agreements.
In some more extreme cases, failing to adhere to these laws/restrictions can also result in you having to compensate the tenant for up to 12 months of rent. When it comes to owning an additional property in Vancouver, you are also subject to the recently imposed Empty Homes (Vacancy) Tax.
The tax is clearly working, as it is returning unused properties to the rental market. However, from an investment standpoint, this means there is more choice for renters. It also means that if your property is empty for more than 6 months of the year, you may be subject to an annual 1.25% tax (based on the assessed value of your property).
The Pro’s and Con’s of Property Investing
Before you can start to determine if renting your property is a good investment, it’s important to weigh up some of the pro’s and con’s of property investing.
So Is Renting Out a Property a Good Investment or Not?
If you have a second property already and it is sitting unused, then in most cases yes, turning that property into an income stream can be a good move. If you are looking to purchase additional property to generate rental income, however, there are other key factors that could affect whether it’s a ‘good’ investment:
The type of property you purchase.
The price you purchase it for.
The return on investment (yield/rental income) and whether this is manageable given your current circumstances.
For example, this case study looked at 3 different property types in Vancouver. The study compared purchasing property as an investment against an equal investment in the stock market, over a period of 25 years. Although it doesn’t look specifically at the addition of earning a rental income on that property over the time period, it does compare the initial capital investment. It found that:
- The value appreciation of buying a condo was actually negligible compared to the stock market investment.
- Purchasing a townhouse or single-family house in Vancouver did lead to capital appreciation and more than the stock market investment. Whilst that appreciation was larger for single-family homes over a townhome, in both cases, it still took 15 years to realize these gains. This indicates that if you’re purchasing a second property for capital appreciation as opposed to the cash flow provided by the rent, you will need to hold the property for an extended period of time to see that real value gain.
Key Advantages of Property Investing
Although that study takes into account the initial investment, it fails to take into account the key advantages of property investing, compared to other investment vehicles:
- The primary benefit of choosing to invest in real estate is that your investment should see capital appreciation, while at the same time the rental income is paying for the mortgage payment (both the principal repayment and interest payment components). As a result, a property investor is building guaranteed equity with every mortgage payment- which is paid by every rental payment.
- Investing in property allows you to leverage your investment. For example, if you have $100k to invest you can only purchase $100k of stocks. However, with real estate, the $100k allows you to become the owner of a $500k asset.
How to Maximise Your Property Investment Return
The key to maximizing your returns from property investing is in purchasing the right property. Whether that means the property is purchased at a ‘good price,’ has a strong rental return, or is in an area that is likely to appreciate, finding the right property can make your investment more lucrative in the long term.
When it comes to doing the research and finding this type of property using an experienced and professional Realtor can:
Help you to understand the current market conditions
Find a property that suits your needs and your budget, to either ensure or help you decide if the return on investment will work for you
Time the market so that you either invest less capital upfront or can find a property with good potential for value appreciation as well as rental income
Help you to set up the property with the right legal, accounting and financing structure
In addition, it’s important to determine if the yield/return on investment is enough to justify the purchase of the property. In the end, you’re looking for positive cash flow, and a sufficient return when compared to other potential investment vehicles. This will be determined primarily by how much rent you can charge, how much your expenses are, and whether you actually end up in the positive after they have been taken into account.
In Vancouver, the rent you can charge will be dictated by the property type and its location. Desirable neighbourhoods like Yaletown and the North Shore hold the potential for regular/annual rent increases, helping you to stay level with inflation and cover all expenses. These areas also tend to see the lowest vacancy rates, which can help to secure your cash flow in uncertain market conditions.
Longer-term investments should also take into account the wider community and access to amenities. Are there new schools and shops being built? Is it close to transit and recreation? Can you justify increasing the rent annually, based on the property type/location?
Ultimately, determining if renting a property is a good investment comes down to preparation and planning. Once you have assessed the risks, taken expenses into account and analyzed your capital and cash flow, you will have a better idea of whether renting your property is a good investment.
At the West Haven Group, we can help you to evaluate your research to determine if the property you’re looking at is the right one to invest in. Similarly, as Vancouver’s top Realtors, we can help you to find the right property, to help you generate income, value appreciation, or both. For more information simply reach out and connect with our experienced team, we look forward to hearing from you!