hello all!

Is it safe to assume a rental property should be "mortgaged to the hilt" to achieve the best long-run financial advantage?

I have been "gifted" with a property. I will need to mortgage it to some extent because it requires renovation.

From a business point of view, is it wisest to take out what capital i can?

Is this 'simply' because I'll have greater interest expense to write-off against the rental income? (I gather I can only write-off the interest cost, not the full mortgage payment, right?)

Any comments or advise welcomed - or if you could point me to a good primer on the financial and/or bookeeping side of being a landlord I'd be very grateful.

best regards,

elfabit

I think it comes down to the other options for investing the money. Can you make more than the rate of interest that you will be paying somewhere else?

Yes you can deduct the interest, and yes it could be a factor to consider.

I know that the people at intuit have a product for rental property management called Quicken Rental Property Manager, but I do not see why you would need something like that. You can probably get by with writing down the rental income and associated expenses. If we are talking about a lot of units and you have a job, I would hire a managing company.

Thank you very much Roberto,

I've learned a bunch thanks to your site!

Since I posted, I've crunched the numbers used your CAP notes and sensitivity form, every-which-way!

... I'm still a bit boggled by things though. I fear I have too many choices.

I should note: it's a single family dwelling (some have said it's just as much work as 10 or a 100 units, with far less profit!) And BTW - there is a willing and capable individual who manages several other properties in the neighbourhood, to act on my behalf as "landlord" for a fee should I choose.

On the subject of "Rate of interest elsewhere" Some have advised me to borrow on the rental and pay my own home down (I still have a personal mortgage balance owing). My personal mortgage interest rate is lower though .... But I'm thinking this would 'wash' since the cost of the money in the rental property is deductible, whereas (I'm in Canada) I pay my personal mortgage with after-tax dollars.

(and I'm not sure how to measure the "interest deductible" factor?)

... and of course I have a bunch of other personal variables on what "pays more" for me! . . . wish lists etc! Complicated by the fact I've been self-employed all my days, and while I don't have a lot to show for it, I am of the "entrepreneurial spirit" and would like to think I could find a good way to invest...

then again. . . .

I could sell the rental property. - It would be free clear "gift" money then (seems complicated, for capital gains purposes (and rental income?) in the future should I keep, rent and mortgage it... but maybe not... I guess it's only math. . .)

and I have concerns - there's been a huge number of single family and rental units constructed in my region recently, and I understand it's a very competitive market for landlords.

. . . If I sold, I could pay off my own home . . .

I don't know how interested you are - I took possession in January - The place was a serious mess. . . throughout this time I've been trying to decide to keep or sell.... But the renovation work is almost complete now! (within the next two weeks) - I've kited it through on my Cards ! (The contractor had this time slot and I can just barely last until completion next month) . . . I have a mortgage broker who is eager for me to sign on Monday! (and I hate to run him around!)

*sigh*

I really don't know what to do. . .

Could you suggest - What a good "holding pattern" might be? (the mortgage I'm currently looking at is a 5 year interest term (but no penalty after three years)

Thank you very much for your time and consideration - It's a great site!
...and I understand I have digressed quite a bit, and that it would be your's (or others!) personal opinion on my situation, - but I sure would be grateful for 'em should they be offered!

best regards,

e

Thanks to this board - I think I've narrowed my thoughs down a bit!



So - here's an answerable question! (I hope!)

I have, apparently, a very good credit rating. (I'm sorry I don't recall the number, but the broker told me he'd only seen one higher) However - I make a very low income. (have mostly moved other people's money)

One bank told me they wouldn't finance a rental property to me (but would a personal) I don't know if this was this particular bank's policy, or how my numbers crunched. . .

But I have really enjoyed contracting this renovation!

Could you folks offer your opinion on how I could best leave myself "bankable" or financially open to find and renovate another property like this one?

Keep or flip?

I would measure the benefit of the interest deduction like this:

Assuming the tax rate is 20% and something like the following is true:

- Your income $40,000
- Your rental income $10,000
- The interest in your house $6,000
- The interest in the rental property $7,000

If you do not take the loan for the rental property you will have:

$50,000 – {20% tax} = $40,000 after tax dollars
$40,000 – $6,000 = $34,000 after paying your mortgage

If you take the loan then the interest is deductible from rental income:

$40,000 + {$10,000 - $7,000} = $43,000
$43,000 – {20% tax} = $34,400 after tax dollars

All of the above is assuming that deductions work on a similar fashion in Canada.

Regarding your question about how to make yourself more bankable. I would say that your first choice needs to be whether or not you will keep the property as you still seem to be unsure about it. One way to look at it is to use this one property as a springboard to acquire a second or two more.

First you need to have it rented and then you can approach a lender from a stronger position. You can leverage this one to buy another one. After looking at hundreds of personal financials, most people have made their money {serious money} in real estate, but it is a long process of acquiring properties. It does not happen overnight.

Dear Roberto,

I've been intending to return to thank you for your time and consideration - for way too long now! (it was a very busy time for me)

Thank you. I really appreciated your advice, and being able to air my thoughts here, I learned a lot!

As it turns out, after weighing all the variables, I sold the property.

And I never did take out a mortgage. But you'll be proud of me, I managed to take advantage of a series of credit card discount interest offers, so actually financed the reno considerably cheaper than the going mortgage rates, especially since it sold fast - 30 days from list to closing. (at a very good price too)

But I'm still following the real estate listings! (so you may yet see me again!)

Thanks again, and Best regards,

elfabit

I am glad everything worked out.