Investing in a rental property can be a great way to build wealth. Done right, you get someone else to pay your mortgage, then pocket a big payoff when you sell. With today’s St. John’s surging real estate prices, the prospect of making a fortune in the property market is luring many first-time landlords into the business.

What should you know before you take the plunge in the real estate market? Firstly, keep in mind is that property prices don’t always go up by double-digit amounts every year. (CMHC is estimating 6% increase for 2008, REMAX is estimating 12%) Restraining your enthusiasm can be difficult when prices are jumping all around you. Successful landlords base their investment decisions upon a property’s ability to put money in their pocket right now. Any capital gains when the time comes to sell are a bonus.

Before agreeing to buy a property, you should scan the classified ads to determine what you can reasonably charge in rent. This rental income should be enough to cover all of your operating costs — including mortgage payments, utilities, maintenance and property taxes — and generate income as well. Aim for an annual return of 6% to 9% of the amount you have invested.

Example: you plan to buy a house for $150,000 and you put down $50,000 as a down payment. Your goal should be to pocket $3,000 to $4,500 a year — that’s $250 to $375 a month — after the mortgage, taxes and maintenance are covered.

Be realistic: Will the rental market allow you to charge enough to cover that return? Don’t forget to build in a “rainy day fund” for the weeks or months the unit may be vacant.

True, in addition to your monthly income you’ll also be building equity in the property, but if the market turns down, your equity may evaporate. Many landlords go wrong by assuming their property’s value will inevitably go up. We have been seeing increases for quite a while in St. John’s, but that doesn’t mean we always will.

Even if the numbers look good, you have to ask yourself if you’re prepared for the day-to-day headaches of looking after a property. It’s not for everybody. The biggest difficulty is finding the right tenants. Dealing with tenants can be quite cumbersome. Familiarizer yourself with the Newfoundland Landlord Tenancy Act.

Incase you’re wondering, you have to claim your rental income to Canada Revenue. You can however deduct from the income any expenses related to the property, including property taxes, mortgage interest , house insurance, and any maintenance or fees for professional services. When the time comes to sell your property, you enjoy a bit of a tax break. Only 50% of any capital gain is added to your taxable income.

Most successful landlords regard real estate as a long-term investment. If you’ve bought at the right price, you enjoy a steady steam of rental income while watching your tenants pay off your property over a couple of decades. Then, if the market is good, you sell — or continue to enjoy your steady rental income.

If you require more information on investment properties in St. John’s please call or email Fraser or Stephen Winters and we’ll be happy to assist you.