Is there any money in rental properties? Part 4 of 4

Dining at the rental

First, apologies this post didn’t appear Friday as planned.

I imagine you’re all curious to see a bit of a financial disclosure on the money side of having a rental property. If you’ll recall, my goals in purchasing this property were not for any short-term gain or to advance my day-to-day cash flow. The goal is long term gain.

Year of purchase, 2005: This year there was a loss. I purchased in June 2005. As you might imagine, in that year I had legal closing costs, some minor repairs, as well as the additional payment I was making on the mortgage of my primary residence. For tax purposes, the loss on the rental reduced my taxable income to the CRA by about $8,000.00.  This meant a refund of almost $3K. My income was steady for the property from July until the end of the calendar year.

2006: The first full year of having the rental, I posted a profit of $449 to the CRA. This is because a landlord can only claim the mortgage interest as an expense, not the principle. By my record keeping, I lost $158 dollars on the property. My total expenses (mortgage principle and interest, taxes, insurance, any repairs) were $158 more than my rental income. Remembering my goals, this was a tiny price to pay for some other soul to pay the mortgage on my property. I can lose $158 on a lot less worthwhile things.

2007: From the CRAs perspective, I made $417 profit on the rental property in 2007. From my own cash flow, I had to give up $2,900 of my own money to keep the rental in 2007. This year my first tenant left, and I put in about $2,500 of repairs and maintenance. While this was substantially more than the $158 investment in the previous year, I still considered it a contribution toward my retirement savings.

2008: For the life of me, I can’t find my T1 for 2008 (that’s the document that tells me my total income claimed and then any taxable income). I can tell you that I claimed a profit in 2008 to the CRA, and posted one personally, with a gain of $418. This was a pretty stable year, no repairs, no tenant changes.

2009: This was the second straight stable year in a row. With dropping interest rates on my variable mortgage, I paid less and less interest to the bank. I claimed a profit of almost $5K to the CRA last year, and posted a personal cash flow bonus of almost $500. I did some repairs to the property including a new roof and new carpeting on the stairs. These receipts could not be used for the Home Renovation Tax Credit, as they were intended for your principle residence only. They were, however, still expenses for the regular maintenance of the rental property.

What’s the bigger picture? The property has increased in value by about $30,000 in five years. There is now about $55,000 worth of equity in the property. My initial outlay for the downpayment was $11,000.

This year I’m likely to claim a loss to the CRA and personally. Not only will there be some lack of income for a couple of months due to a tenant switcheroo, but I’m also replacing the flooring on the main level. Carpets are just a dumb idea, particularly with a rental property. I’m investing in a product sold exclusively by Home Depot called Allure. I’ve also got some plumbing to do. The great news is I have a money order in the bank for first and last months rent from my new tenant, although I know their stay is only for a few months.

Somebody smarter than me can do the math on this, but I think the money I’ve put into the property thus far has been a good investment toward that $55,000 of equity (actually $44,000 if you count my initial downpayment). I’m absolutely not convinced that I could have put the money I’ve spent thus far into an investment and have $44K today.

I understand that I don’t actually have the $44K right now, but it’s a positive influence on my net worth. My goal is to keep it going in that direction.

Finally, I would be remiss if I didn’t let you know two other motivations for keeping the property. First, if (heaven forbid) it turns out I can’t keep my home in Toronto because of a job loss or some other urgency, I always have another place to go. Secondly, with two properties to my name, and two daughters, if something should happen to me while I’m still working, they have a good head start on the housing market, whether they chose to keep or sell them – they’ll be paid for with my life insurance pay out.

It was good to assemble a five year picture here. It seems I’m getting exactly what I wanted, no fast cash, and a slow build up of equity.  Let’s home the next five years are as reasonable.

Questions? Comments? Fire away!


2 responses to this post.

  1. Posted by Melaniesd on June 23, 2010 at 11:11 am

    Hello! This is my 1st visit to your blog – won’t be my last!

    I am very interested in getting into the rental property market. I am curisous how you fund your renos/repairs? Do you a lot a certain amount from the rental income or do you have LOC or savings for these expenses?
    Also, is your rental a single dwelling or multi unit?


    • Melaniesd, I’m glad you found a new place to visit! Thanks!

      I don’t really have an official spot to fund renos/repairs for my rental property. I often take advantage of Home Depot’s credit card option, where purchases over $299 don’t have to be paid for 6 months. I use their kindness, and usually divide my total payable by six, and pay it in six equal installments so that I don’t accrue interest, or pay them any interest at all. I haven’t paid them interest yet!

      Normally, I have enough room between my rental income, and my regular rental operating expenses to withstand an additional small, monthly payment. However, should this not be the case, I’ve used a line of credit to cover my landlord butt. This isn’t what I’d advise anybody do. Currently, I’m trying to pay off my line of credit, and I’m on target to do that by December or January.

      What I need to do is build a bit of a maintenance budget for the rental. Something I haven’t done yet, but I’m working on pulling up my financial socks in all areas of my world.

      My unit is a single family dwelling. I wouldn’t do a multi-unit because I don’t want to deal with the infighting and quibbles between tenants. So far, I’ve been a lucky landlord.


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