How to minimize the cost(s) of financing a rental/investment property
Owning a rental property is a lot like owning a corporation in the sense that minimizing costs, and maximizing profitability. The cost(s) of owning a rental property generally break down as follows:
- Mortgage Interest Cost
- Property Taxes
- HOA/Condo Fees
For the most part, the cost(s) of these items is out of your control as a homeowner. Property tax rates are set by your City Council, and HOA/Condo Fees are set by your condo board/homeowner’s association board. You can affect utility costs by installing high-efficiency appliances, furnace(s), and fixtures, and maintenance is ultimately under your control as a homeowner -however, most jurisdictions have mandated guidelines for rental housing that must be followed by landlords. The final cost item for a rental property owner is mortgage interest.
At first glance, the cost of a mortgage on a rental property appears to be out of a homeowner’s control; much like condo fees, and property taxes. However, upon closer examination, there are some clear differences in homeowner control when comparing property taxes, and condo fees, with a mortgage.The two primary differences are:
- Mortgage Product Selection
- Ownership Style
Mortgage Product Selection
As a homeowner looking to finance a rental property, you have the ability to choose from a variety of products that vary in terms of interest cost, mortgage loan insurance premiums, term lengths, payment options, and even rate security.
Choosing a mortgage with a lower rate is an obvious avenue for reducing the cost(s) of owning a rental property, however, in the long run, the finer details can prove to be incredibly important in affecting the cost of a mortgage. We’ve discussed this concept before, when we talked about how the cost of a mortgage is affected by more than just rate, and those same principles hold true in the case of a mortgage registered against a rental property. When shopping for a mortgage on a rental property, be sure to go over the many aspects of the product that will affect its overall cost, including: compounding, payout penalties, registration type, prepayment privileges, and payment schedules.
As mentioned before, owning a rental property is a lot like owning a business, and therefore, owning a rental property can be setup just like a business. Purchasing a rental property in a corporation’s name (with the homeowner’s registered as guarantors for the loan) can often provide homeowners with additional cost benefits, allowing for mortgage interest, and other expenses to be deducted from the rental income.
Equally as important, just like when setting up a business, before deciding to setup the ownership structure for a rental property in any way (name or corporation), make sure to talk to your accountant to ensure that you are aware of any ramifications that could arise from making this change.