Tips for Converting Your Own Property into an Investment
Have you thought about investing but you’re not sure if you’re ready to make a purchase? Perhaps you’re planning to move and you’re thinking of turning your current home into a rental? All of these are big decisions that could change the course of your financial journey. If you decide to turn your own property into an investment, you will have to deal with challenges such as moving, creating a business, and handling taxes and administration. With that said, here are a few tips to consider before making this move!
#1 Check your Mortgage
Converting a property you already own into a rental can be tricky if you’re still paying the mortgage. If that is the case, you will have to check the fine print of your agreement or simply consult with your mortgage lender to see what you will be getting yourself into. Keep in mind that doing paperwork is going to be far more difficult if you’re trying to convert your primary residence into an investment property. The reason behind this is that most mortgage lenders require a home that was purchased as a primary residence to remain a primary residence at least 12 months after the purchase. That means you’ll be able to convert it eventually, just not right away. Make sure to check your specific mortgage agreement so you don’t end up accidentally committing mortgage fraud.
#2 Prepare for Taxes
According to the Canada Revenue Agency, “every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs. If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.” If you’re not confident in your understanding of Canadian tax laws, make sure to hire a professional accountant or a tax expert to help you throughout this journey.
#3 Change Your Insurance
Your current property is most likely insured under the category of a primary residence. However, as soon as you make a change in the property’s purpose, you are going to have to change the insurance as well. You need to switch from a homeowner policy to a rental insurance policy to make sure your property is fully protected. Keep in mind that it is best to complete this step as early as possible, since insurance companies will deny your claims in case of damage by a tenant. All you have to do is make a quick call to your insurance agent and you might even be able to handle the task without scheduling a meeting.
#4 Don’t Forget the Upgrades
It’s easy to get lost in all the paperwork and administrative tasks tied to converting an owned property. However, don’t forget that you still need to prepare that property for the rental market. You can’t just call it a rental and bring in tenants to pay you a monthly fee. In most cases, you will have to make certain upgrades to ensure the property can be rented for a competitive price. Although the thought of doing renovations might not sound like everybody’s dream, this is a great opportunity to increase the value of your property and hence insure a better ROI in the future. Keep in mind that certain upgrades will attract higher quality tenants. On top of that, decide whether you want to rent the property furnished or unfurnished.
#5 Educate Yourself on Being a Landlord
Last but not least, you have to prepare for the challenges of being a landlord and managing your own rental property. This is one of the most exciting parts of the job, although many newbie investors don’t like to be overly involved with the property. If you don’t feel like doing the landlord duties such as collecting rent, assisting tenants, and handling issues as they arrive, consider hiring a property management firm to do it all for you. I personally believe it is best to get that hands-on experience with property management, as this will allow you to better understand the business and cater to your future tenants more professionally. As you grow your portfolio and purchase more properties, then you can consider outsourcing these tasks to a third party.
Need Help Getting Started?
If you’re planning on converting your property into a rental or you want to purchase a new property altogether, consider getting mentorship as a way of educating yourself on the business you’re about to run. Feel free to schedule a quick call with me to discuss your opportunities.