There are two primary strategies you can employ when considering an investment property. You can choose to live in a part of the property yourself, while renting out another flat or apartment in the same building. Another option would be to buy a separate unit, based solely on its investment potential. This can be a very worthwhile venture, but it has tax implications. In Canada, only the profit made buying or selling your principal residence is non-taxable. Secondary properties are normally subject to tax for any gain in price, although expenses to get the house ready for sale are often deductible. Whether it's your principal residence or not, rental income less some operating expenses is normally taxable. The first step in your planning should be to thoroughly investigate and understand the income and taxation implications of each strategy.

Leverage
Secondary home ownership is an attractive investment option because it gives you even more leverage than you have with your principal residence. Leverage is when a relatively small amount of your money controls a much larger asset - like a property. 

The more leveraged you are, the greater the financial return on your down payment becomes if the value of your property increases. There are very few other investments which can be purchased with such a small percentage of your own money.

For instance, let's say you acquire a second property for $100,000, with a $15,000 down payment, and during the first year that you own it, the property increases by a value of three per cent for a $3,000 gain. As a result, the return on your down payment of $15,000 is 20 per cent - $3,000 divided by $15,000.

Other Investments
By comparison, let's say you were to buy a term investment of $100,000 (in cash) for one year and it increased by $8,000 over the course of the first year. Since it cost you $100,000 in cash to buy it, the return on your investment is only eight per cent before taxes. Obviously, leveraging is a powerful way to make your money work for you.

Getting Financing
You should be aware that many lenders place non-owner occupied deals in the high-risk category and it's not that unusual to find lenders who will not finance rental units at all - or those who will only finance them if they are insured.

Obviously, lenders will want to know whether the property will carry itself. (Is there sufficient rent to cover the mortgage payment?)

Don't make the mistake of assuming that a rental income of $500 per month will carry a mortgage payment of $500 per month. Only a portion of the rent is used to pay the mortgage; the remainder must cover taxes, maintenance, vacancy, bad debt and expenses.

(Many inexperienced purchasers think that owning rental properties will allow them to "get rich quickly" and when this does not happen, the owner becomes disillusioned and loses interest in the property.)

Costs
You should also be aware that the cost of obtaining a mortgage (for legal and appraisal fees) on a non-owner occupied property can be higher than the cost of obtaining a mortgage on an owner-occupied property, when more than one unit - such as a duplex or triplex is involved.   

Interest rates charged on rental properties might also be higher because some lenders view these properties as being a higher risk.

As mentioned above, the main responsibility of having a second property is being able to carry it financially. And if you're like most people, you'll probably have to rent it to someone as a result.

This is also a great deal of responsibility because you will have to maintain the property in addition to your own principal residence, and you'll be responsible for finding tenants who you trust and feel comfortable with.

Some parents with grown children ready to go off to university or college choose to purchase secondary properties for their offspring to live in while they attend school. This gives them an excellent investment and they are assured that the occupants will take good care of the home

Once you've decided your strategy, it's time to start planning on the return you want on your investment. Your Right at Home real estate professional Mike Perrin can help you "crunch the numbers" by advising you how much you can afford to pay, offering mortgage financing options, counseling you on what range of payments the rental market will bear, estimating operating expenses, and much more.

Once you know what you can afford, it's time to start looking. You've heard the old saying that the three most important things when buying a home are: location, location, location...and this is even truer when choosing an investment property. Not only are you looking for a home that will appreciate in value, you also want a home that will be appealing to renters for an extended period of time. That means you want a location that's handy to public transit routes, and is easily accessible to major amenities. Your Right at Home real estate professional can help you identify neighbourhoods with good investment property potential.

Make sure that your real estate professional clearly understands your intention to rent out a portion of the home. Many homes for sale will advertise that they have an in-law apartment, or granny flat. This usually means that the space functions as a separate unit, but the property is not zoned to use it as a legal income apartment. You can rely on your Right at Home real estate professional Mike Perrin to advise you on zoning, and safety requirements before you make that offer.