Should you buy a property for passive income?

Should you consider buying a property to earn passive income? Many Canadians are looking for ways to expand their income stream beyond their day jobs, and real estate investment is a common path people take. However, before jumping into the market, you need to decide if this is the right choice for you. Here are some points to consider about passive income properties before taking the plunge!

What does it mean to buy a home for passive income?

What do we mean when we talk about buying a property for passive income? This means purchasing some type of home, whether that be a detached house, condo, duplex, etc., with the purpose of renting it out. Income from rent will be used to pay off the mortgage on the property. This means over time, the property will bring in revenue once the mortgage is fully paid. People can either opt for a short-term rental style that targets vacationers on platforms such as Airbnb, or they might look to lease the home long-term to renters looking to settle.

The goal is that once this property is established and running, it will earn money without the owner having to do much day-to-day work. This is where the “passive” side comes into play.

What are the advantages?

What are the pros of buying a property for passive income? There are a few reasons why people choose to take this path. The most obvious benefit is the extra cash flow that comes in each month. When your property is rented out and you have tenants paying you, this can be a reliable and consistent source of income. As we mentioned previously, this revenue comes without the commitment of a full-time job (in theory!). 

Second, you can expect to build home equity over time. As you pay off the mortgage on this property, you are working towards owning the home free and clear. Eventually, this can let you refinance to access extra cash flow. You can use this to buy another property, or address other financial goals. Plus, if the property appreciates in value over time, this means you can get even more bang for your buck.

Finally, properties used for passive income can act as a financial cushion for those planning for the future. If you are preparing for retirement, for example, you might be saving the cash from this property, or planning on selling the home later on. In any case, owning this type of property means adding extra financial security to your future.

What are the drawbacks?

Now, what about the downsides to this type of investment? Right off the bat is the fact that you need to have the money to handle the upfront costs of this project, which will be high. You need to save for a down payment, closing costs, and monthly mortgage payments, just like with a regular home. Even if you plan to rent out the property, you should be prepared to pay as well. This can be a large barrier that prevents people from pursuing this type of investment.

Next, you become a landlord when you own a passive income property. While the goal might be to earn income without extra work, this isn’t always the reality. You are responsible for finding tenants, addressing maintenance or property concerns, maintaining the property, and potentially dealing with troublesome residents. This can be a major time commitment.

Finally, there can be stressful periods when your property is not rented. This means you will not have any money coming in, but you will still be on the hook for your mortgage payments and general upkeep. You need to be prepared for vacancies and have the funds to cover the expenses in such situations.

Reach out to your mortgage broker!

Before taking any action on buying a property for passive income, it’s important to chat with your mortgage broker. This path is not for everyone, and it’s best to have an honest conversation with a mortgage professional early in the process. We can help you understand your potential mortgage affordability, today’s market conditions and lender options, and ensure this project matches your financial goals and abilities. Going into the process prepared will make a huge difference!

If you think this type of project is right for you, take the time to get in contact with a mortgage broker now. It’s never too early to start preparing, and we are here to help you enter the market with confidence! Your path to passive income starts here.

If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.