10 tips to retire early by leveraging rental income

Fund your retirement by using rental income to become mortgage-free quicker or to subsidize pension income in retirement.

A shot up an apartment building from the ground-level.

Whether you want rental income to fund your own move to a higher-priced market, to be mortgage-free faster, or to subsidize pension income in retirement, there is, quite possibly, a whole new mindset to adopt in order to effectively realize your ambitions.

In short, your priorities as an investor are very different from the priorities you might have had as a first-time homebuyer—or during your subsequent primary residence purchases. Following that, there are concerns you’ll face as a landlord, along with pitfalls you can avoid.

Meet Mark, who retired early by earning rental income

Mark, like a lot of our clients, believes that house prices increase in the long run.

“That was one of our motivating goals and one of our reasons for looking at getting another house,” he says. After he and his wife paid off their primary residence, the couple began looking for their retirement home in a more expensive market, moving from Winnipeg, Manitoba to the Okanagan in British Columbia.

Buying during a hot market, the couple took a long time to find their first rental property—one that was nice enough to be rentable, without a lot of maintenance issues to contend with. (As a landlord, Mark says that you of course want to ideally pay only for minor maintenance and repairs, not major fixes such as foundation issues.)

Ultimately the couple found their property, used the equity in their paid-off home to obtain a down payment, and applied for a mortgage to fund the balance of their purchase. Within a few years, they found themselves in a position where they could retire early.

Mark’s hard-won knowledge and experience translates into a number of very practical tips for those interested in following a similar path.

1. Treat this seriously

His most notable suggestion is that would-be buyers think like serious investors when considering this particular retirement plan.” You’re putting time and money into the property and upkeep, and that is valuable. But also do research, improve your real estate knowledge, know the tax laws, and roll up your sleeves when needed,” Mark says. By treating it like a serious job, you have a better chance at great returns to fund your retirement.

2. Start sooner rather than later

“Like investing, it’s difficult to say when exactly might be a good time to get into the market. That said, there is the potential to earn real income every month,” Mark explains, noting that the earlier you start, the higher your returns will likely be. Similarly, building equity in the properties you’ve purchased only happens with time.

3. Do your due diligence

Do the best job you can of understanding the market you’re buying into. “Have solid and realistic expectations about the rents you’ll collect each month,” he continues, noting that you can work with a real estate agent or research through REALTOR.ca, Kijiji and similar sites that have rental listings.

Evaluate the cost of your mortgage payments, property taxes and other monthly costs. (Don’t forget to consider utility bills and house insurance.) Budget for missed months where your property may not be bringing in income.

“Don’t pass on home inspections,” Mark cautions. Such advice is tough to follow in a market where people are coming in with straight cash offers, but as Mark points out, “a home inspection is not ever something you want to skimp on as an investor. You need to be assured that the property doesn’t have any hidden surprises—or costs.”

4. Save up 20 per cent

Less than 20 per cent means paying CMHC Mortgage Loan Insurance each month, which protects the lender in the event you can’t make your mortgage payments. Lenders typically pass this cost along as part of your monthly mortgage payments—an additional expense that will eat into any monthly income derived from your property.

5. Don’t overpay

As part of your due diligence, also understand who you’re competing with so you don’t overpay for a house. “You’re buying an investment property, you’re not a first-time homebuyer buying a house you’re going to sit on for 30 years—in which case you can overpay a bit,” Mark says. “As an investor you don’t want to overpay.”

6. Look after things quickly

“A loose screw in a door handle can be tightened quickly, or it can break off because of neglect,” he explains about the maintenance of rentals. Close and quick attention is needed to preserve every bit of value and prevent small issues from becoming larger, income-cramping expenses.

7. Get tax advice

There are different types of expenses, all of which are treated differently by Canada Revenue Agency. There are also a host of deductible expenses to know about and claim each year at tax time.

A tax advisor and real estate professional can also help you to determine the best time to put it on the market—and can advise on capital gains taxes you’ll pay on your property when it comes time to sell.

8. Become very, very detail-oriented

“Understand the dollars and cents and pay close attention to costs,” Mark goes on. Although he and his wife initially made use of a property management company to screen tenants, collect rents and deal with issues, he says the close attention they paid to the property made them comfortable to assume those responsibilities themselves. “This also saved us ongoing costs, which helped towards our retirement planning,” he elaborates.

Get software or create a spreadsheet to manage receipts and records in the event you are audited. Input receipts monthly, not all at once at the end of the year.

9. Watch the real estate market

A close attention to detail, and hopefully the resulting intuition you’ll develop about your property and its maintenance, might also help you to determine the best time to sell. “This can happen when property prices are going up, when you’re moving away from the property, or when you notice monthly costs are on the rise,” Mark explains, having kept his finger on the pulse of his properties in Winnipeg and B.C.

Having a good sense of the market can also help you to know if there is an opportune time to buy into a bigger property or a more expensive market.

10. Reduce risk whenever possible.

Get to know the tools at your disposal for tenant screening, credit checks and application management—there are several on the market, some of them free. Property management companies can also be a good resource for first-time landlords.

“Risk is always there, but we try to reduce it as much as possible,” Mark says. “Don’t make assumptions and don’t get complacent. Don’t ever be lazy with your property. It’s your retirement, and if you look at it the right way, it can save you years of extra work.”

How Wyth can help

Wyth specializes in complex lending solutions for every stage of your home buying experience. We can assist you in finding options to finance your rental property.

We also offer great mortgage rates and you can get a mortgage commitment in as little as two business days.