Quest for Quiescence

One alternative income stream I’d like to create for myself is a real estate rental property. Lots of people have been making money in real estate for a long time. There are many ways to make money with real estate by the model I’m most interested in is a rental property.

Why a rental property?

Cash Flow – Rental properties provide cash flow. A revenue stream that continues to come in month after month.  There are other models in real estate that many people follow but they usually involve a large capital investment or a lot of time in exchange for a large lump sum of money. These models do not appeal to me at this time.

Tax Deductibility – Here in Canada, interest paid on mortgages for a personal residence is not tax deductable. However, interest paid for investment loans are. One popular tax savings strategy is to invest cash into paying down the mortgage on a personal residence. The equity that is built up in the house can then be used as collateral for a tax deductible investment loan. This loan can in turn be used to purchase real estate. This is an effective way of essentially making a non-tax deductable mortgage tax deductable.

Diversification – Most of the methods for creating alternative income streams I’ve been looking into are internet based. It seems like a good idea to try something in the “real world”.

As good as real estate investing sounds, I’m having a difficult time getting my foot in the door. We built our house just over 5 years ago. In that time, the real estate market in our area has seen tremendous growth. We recently had our house appraised and the value came back at double what it cost us to build! With all the extra equity we suddenly have built up in the house, we decided to set up a  re-advanceable Home Equity Line of Credit (HELOC). Basically a revolving line of credit that’s tied to the equity in our home. As we pay down the principal on our mortgage, the limit on the line of credit grows, up to some percentage of the value of our home. This created a large sum of credit , suddenly available for a worthy investment. Once the HELOC became available (or perhaps a little before) I immediately started looking for an investment property. The problem is, the entire real estate market here (not just our house) is really expensive right now.  It turns out, the money I’ve accessed with our HELOC is simply not enough to get into a decent rental property in our city.

The next option is out of town real estate. Or, how about out of country? I’ve been referred to a real estate agent in Florida who has been passing on some really interesting properties. A 1,200 square foot condo, about two years old, in Florida, is selling for around $50-$60K. Something like that would fetch around $250-300K here. This got me really excited, but as I’m beginning to realize, when your looking for cash flow, the cost of the home isn’t all that matters. You have to think about rental rates. Rental rates in Florida are much lower than they are here. So much so that when you consider taxes, utilities, condo fees etc, even at $60K, It seems like there wouldn’t be much left for cash flow. To make matters worse, in today’s low interest rate environment, interest rate increases are very likely which would reduce the potential for cash flow even more.

I’m still interested in finding a rental property to generate some monthly cash flow, but I think I’ll need to do a lot more research before I’m ready to put equity from my home on the line.  Would you consider investing in real estate right now? Submit a comment and share your thoughts.

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