Income from rental property is another predictable income stream. I would like to share our first experience buying rental property in one of the most expensive cities in the world—Vancouver. I think that income from rental property should cover all related expenses, and the best scenario is that it generates a bit more money in profit.
Our first rental income came from a one bedroom condominium in the Vancouver suburbs. Because Vancouver is an unaffordable city, renting is much cheaper for us than buying a property. However, real estate is also a passive income stream we want to utilize, so we decided to buy a small condominium. It was not an easy decision because we had never bought property before, and the down payment was a large sum of money. Putting the money in dividend-paying stocks was another alternative. People like to come and live in Vancouver from all over the world because it is a very livable city. After a few years of investing in the stock market, we learned that diversification is important. Investing directly in real estate diversifies our overall portfolio. After reviewing all of the pros and cons, we decided to do it, and it turned out to be the right thing to do.
Over the last few years, the Vancouver housing market was hot. Buying a new property was profitable a year after construction. Additionally, a new property has a warranty from the builder, which means there are no maintenance expenses during the first several years of ownership.
We bought our condominium in a building managed by the Strata company, and there is a need to pay the management fee every month. Strata is responsible for building insurance, property manager’s fees, gardening, garbage collection, water, common property maintenance, upkeep of amenities, cleaning, repairs, and more. This can be viewed as a disadvantage if you are a handyman but can be an advantage if you do not have time to deal with home repairs.
This type of income stream requires a bit more participation, but it can be used with leverage, i.e. with borrowed money / mortgage. It also allows you to borrow (refinance) cheap (at today’s rates) money if the property price goes up. The borrowed money can be spent on anything, but it is better to reinvest it in one of the income streams to advance your financial independence.
I think this type of investment is very popular because unlike stock shares, people can see and touch it.
Banks recognize that a mortgage is a very good debt and are ready to lend more money if you own property. I have tried to find a lender against our dividend portfolio but could not.
We paid a total of 20% of the total condo price, including taxes, as a down payment. Paying 20% eliminates the need to insure the mortgage, thus saving us money every month.
It is nice see that our debt is paid by tenants, and the increased condominium price allows us to take that money and invest it again. For this investment to be profitable, the condominium rental price should cover all related expenses, i.e. strata fee, mortgage, and property tax. When that happens, we will free to think about our next steps to financial independence.