Investing in property
If you can’t stomach the ups and downs of the rollercoaster stock market, your investment thoughts might be turning to real estate.
With the current climate of low interest rates, you could well find a property bargain.
But check why it’s a bargain. Good reasons include an estate sale, somebody who can’t afford to keep the place, owners retiring to a smaller place. Bad reasons include undesirable neighbours or neighbourhood, problems with the house or land, negative future prospects for the area.
“Most investors who have made profits in real estate did so by taking on a lot of risk, worry and work,” says Pat McKeough, publisher of The Successful Investor and other investment newsletters,
“They also went into it with realistic expectations and the intention of holding on to their properties for many years.”
Selling real estate can take time and cost quite a bit – especially when values fall.
Investing in your own home provides the personal “yield” of a roof over your head, and any profit is usually tax-free. That means if you invest your labour to improve the place and eventual sale price, in effect you are earning tax-free income. You can also claim tax deductions if you rent out part of your home or use it for business.
Investment in a rental property also offers tax benefits. You can deduct most of the major expenses including mortgage interest. And when you sell, you pay tax on only half of any capital gain.
But the personal side – in the form of dealing with tenants – can prove to be a negative.
“Desirable tenants tend to stay put for five to 10 years so they are rarely in the market for new accommodation,” says McKeough. “Bad tenants move much more often, sometimes with their rent in arrears. Because they are often back in the market for housing, bad tenants make up an oversized proportion of people who answer homes-for-rent ads.”
Dealing with the red ink tide
Good intentions often aren’t quite enough to wash away the red ink of debt as quickly as hoped.
A Manulife Bank survey showed while about half of the 2,409 Canadians aged 20 to 69 earning more than $40,000 a year said they had good knowledge of debt management, less than one-third met their debt reduction goals in the past year. And only 41 per cent are comfortable with their debt. Almost one-quarter said they were embarrassed to talk about how much debt they had. And 55 per cent said they seldom discussed debt with friends or family.
Thanks to your holiday season spending last December – especially if you went away – you might be seeing a rising tide of red ink washing over your credit cards and line of credit.
And if you feel financial institutions eye that rising tide with equanimity, you aren’t alone. The Manulife Bank survey shows only about 16 per cent of respondents felt their bank helped them pay down debt or put their needs first.
Even if you are debt savvy and are satisfied with your debt reduction progress, make sure you can check off the following points:
• You distinguish between good debt (money borrowed to make profitable investments) and bad debt (credit card rates on outstanding balances can typically run 20 to 30 per cent).
• You can turn that bad debt news into good news by paying off those most expensive debts first – in effect, earning a guaranteed, no-risk after-tax return of 20 to 30 per cent. Even paying off a 10 per cent debt yields you a similar no-strings-attached return of 10 per cent. You can’t beat that sort of investment.
• Other bad debt includes money borrowed to pay for goods and services whose value disappears long before the debt is repaid.
• Stressful debt includes too high a level to be repaid comfortably – whether because expected income drops or because the payments are so high there’s not enough money left for many needs let alone wants.
– Copyright 2018 Mike Grenby. Grenby is a columnist and independent personal financial adviser; he’ll answer questions in this column as space allows but cannot reply personally – email [email protected]
