Are you planning to put your property out for rent?
If you do not have prior experience with the rental market, you may be surprised at what’s to come.
Typically, we think that as long as the rent covers the mortgage, taxes, and fees, we’ll be doing decently.
Having that expectation can lead to financial distress. The number of unexpected costs will take a toll on your investment goals.
In order to not get caught short, you should take the time to go over the different expenses that may occur.
Also keep in mind that one of the biggest advantages of real estate is all the tax-deductibles on its expenses.
I will list all of these below.
These are the standard tax-deductible expenses that most people know about.
- Mortgage interest
- Property taxes
- Property maintenance
In order to get your property rented out, it’s got to have some standards.
Basic things like plumbing, wiring, and appliances should be working perfectly fine. You could go even further and get some landscaping done.
- Repairs (plumbing and wiring)
- Utilities (gas, electricity, water)
- Travel (for maintaining your property)
In order to find your tenant, you might come across these tax-deductible expenses:
- Paid advertising
- Hiring a property manager
- Real estate agents
- Office items (small items like pens and stationery. Not desks, chairs, etc)
- Travel (to show your property to agents)
Once you have found a tenant, you may come across these tax-deductible expenses:
- Electricity (if included with the rent)
- Water (if included with the rent)
- Cable (if included with the rent)
- Gas (if included with the rent)
- Oil (if included with the rent)
Above, we saw that there are so many tax-deductible expenses!
Unfortunately, there is a limit to how much our government will give us that sweet dough.
The following are not tax-deductible.
- Mortage principal
- Land transfer taxes
- Notice of assessment penalties
- Value of your own labour
- Personal portion of expenses
Personal portion of expenses - this might be confusing. Basically, if you are living in a 10-room house and you are renting out 4 of the 10 rooms, it means you can deduct:
- 100% of the expenses for those 4 rooms, such as maintenance and repairs
- 40% of the expenses for the house, such as taxes and insurance
The purpose is to separate your personal versus rental allocations.
I hope this post helps you with getting proper numbers when you do your cashflow calculations. Remember, it’s better to hope for the best but prepare for the worst. Don’t get caught unprepared. Be brutally honest with yourself when doing these estimates. You will be better-off in the long run.
Happy investing :)