Imagine being a land baron; building an empire of rental properties and receiving a steady stream of passive rental income. Wouldn’t that be nice?
Wait! Before you wave goodbye to your boss and dive head first into the world of real estate investments, here are some basic terms to become familiar with.
Capitalization (“Cap”) rate
The Cap rate is the ratio between the net operating income produced by the property and its capital cost (the original price paid for the property) or alternatively its current market value.
Financial statements
The Income and Expense Statement (or Profit & Loss Statement) tracks what you are earning and what you are spending on your investment.
The Balance Sheet shows assets, liabilities and equity. It is a snapshot of your net worth, and serves as a motivating aspect of your investment program.
Authorized or non-authorized
“Authorized” or “non-authorized” usually refers to a secondary suite and whether or not it has been approved by local authorities.
Municipal governments set and enforce guidelines on how a property may or may not be used. The City of Vancouver now permits suites in every detached single-family home in Vancouver within the RS, RM, and RT zones. Visit their website for more information on building and legalizing your basement or secondary suite.
Rent roll
A rent roll is a register of a landlord’s lands and buildings and the rents due for each of them, usually on a per month basis. For example, if you were buying a multi-family home, the rent roll would provide a snapshot of the rents due per the signed and valid tenancy agreements.
Chattel vs. fixture
A chattel is personal movable property, which is usually not included with a property purchase. e.g. furniture, domestic animals.
A fixture is fixed to the property in a manner that it becomes part of the property and will normally be included when the property is sold. e.g. garburator, motor for ducted vacuum.
By law, a fixture is included in a property sale and a chattel is not. If you are unclear whether something is to be included or not, make sure your REALTOR® adds it to the Contract of Purchase and Sale. e.g. in the case of a ducted vacuum, include the hose and brushes. Or if a TV is attached to a wall bracket, include it in the contract to avoid confusion or disappointment.
Residential Tenancy Branch
This is the government authority for residential tenancies. Note that changes to tenancy laws, including amendments that limit the use of vacate clauses in fixed-term tenancy agreements and that limit rent increases between agreements with the same tenant took effect December 11, 2017. Visit their website for details.
Remember, before you think about investing in a rental property, begin with owning your principal residence. All of the appreciation in value will be free of capital gains tax provided the property is your principal residence for every year that you own it. Beginning in 2017, you must report the sale of your principal residence on your tax return. More information can be found at cra.gc.ca
It’s important to know what you are getting into when buying real estate. Call me today if you are thinking about buying, selling or investing: 604-880-6117
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