~ Wednesday, February 5, 1992 — North Shore News Rental properties can make sound investment INVESTING IN revenue property can be a sound move. But you should always check that the numbers make sense, said a certified general accountant (CGA). Rental and expense figures will vary according to where you live (or invest), whether the building is residential or commercial, and so on; interest rates will also vary. But the underlying principles that follow remain the same. The CGA gave the following example, based on an actual situa- tion submitted to him by a client. Let’s say you are looking at a place for $200,000. Rental incorie totals $14,000 a year. Perhaps you afte paying cash. After expenses, you net $12,000. That’s a return of 6% on your money. “Forget it,"” you say. ‘Who needs the headache of dealing with tenants? I can make far more than that in a guaranteed depos- ue 27 'That’s true,’’ said the CGA. “But your guaranteed deposit produces interest which is all tax- able. So you can cut that return almost in half. And the deposit itself won’t increase in value. “The property, on the other hand, produces taxable rent of Silk Purse WEST VANCOUVER’S Silk Purse begins offering its free Wednesday evening public lectures this week. Tonight Vancouver City planner Alan Slater Duncan will discuss policies for municipal public. art programs in a talk entitled, ‘‘Di- rections in Public Art in Canada.”” Next Wednesday, Feb. 12, Simon Fraser University English professor Paul Budra describes the 6%, which vou also cut about in half to find your after-tax return. But if history cepeats itself, the value of the property itself should increase over the years.”” Let’s say that increase averages 7%. You pay no tax on this in- crease, so your return — at least on paper — is 7%. Add 7% to your after-tax 3% return on the rent, and your true return is 10%. And that is higher than the after- tax return on your guaranteed de- posit. Even when you sell, under pres- ent rules up to $100,000 of your capital gain can be tax free. ‘But what happens if, as is common, you have to finance the deai?’’ said the CGA. ‘In fact, you might even fook on such an investment as a way to reduce taxes.”” Let’s say you don’t have $200,000 cash. You put down $50,000 and borrow $150,000. At 13.5% over 20 years, your pay- ments will be $1,772 a month or $23,258 a year. in the first year, at least $20,000 of that will be interesi. Because your rental income is only $12,000 you have an $8,000 loss. You may deduct that loss from your cther (employment, invest- ment) incom:, which means your after-tax cost will be $4,400 to $4,700 if your taxable income is more than about $29,000 a year (which puts you into one of the highest tax brackets). Note that investment losses could create or increase your CNIL (Cumulative Net Investment Loss) balance which could Testrict your use of the capital gains exemption. “Of course, you have also given up the interest you could have earned on your $50,000 — perhaps $3,500 after tax,’’ said the CGA. *‘So your total cost of putting $50,000 into the $200,000 revenue property is around $8,000 a year. ‘And you should also consider the value of the time you will need to deal with tenants, perhaps do repairs and maintenance and so on.” Let’s say you spend 100 hours a year and could earn $25 an hour. That’s about $1,500 a year after tax. Now ycur total cost of owning the building is $9,560 a year. Add another $1,500 a year for expenses and the total is $11,000. So your $200,000 building must appreciate in value at least 5-6% a year just to break even. Then there’s inflation, so add another 5-6% a year. For you to make a profit — which you deserve for risking your money in a real estate investment — you might want another two or three percentage points, for a begins lecture series f tise of Elizabethan Theatre, its history and cultural context in “‘Shakespeare’s Theatre.’’ On Feb. 19, ‘‘With Our Nation to Peril, What Should British Columbians Do?’’ deals with the curzent constitutional crisis and features University of British Col- umbia economics professor Robert Clark. “What Does Design Offer the Community?’’ looks at how changes in the way Canadians live " # Coupon * Retum this coupon for a Special Bonus of $125,000 Prize Dolters Addi Prowi affect where they live. The last lecture of the month, presented in Persian on Saturday, Feb. 29, is a financial planning and personal insurance lecture by Bahram Bakhtiar. All lectures begin at 7 p.m. with the exception of Feb. 29, which begins at 10 a.m. The Silk Purse is located at 1570 Argyle Avenue. For infor- . mation, phone 925-3605. RINGTONS South, West Vancouver grand total of 12-15%. “You must decide if there is = good chance your property will increase in value an average of 12-15% a year,”’ said the CGA. “To tip the balance in your favor, you might find a rundown place you can fix up with a rela- tively small investment of time and money. This renovation might enable you to raise rents, or create more rentai units to increase your rental income. “If you choose the location carefully, you could increase your chance for a higher capital gain: ® 1992 Boats, Personal Watercraft and Accessories ® Test your speed in the Sailboat Power Test Challenge Marine Facts Theatre featuring Ocean Explorers Andy & Liza Copeland Enter to win in the $25,000 Grand Prize Boat Giveaway and daily prizes Boating Travel Getaways S.A perhaps your land will be wanted for a future development.”” On the downside, vacancies could reduce your rental income. Unexpected repair bills or tenants whose cheques bounce could also reduce your return. “‘Many people who own reve- nue property will tell you what 4 headache it is,*’ the CGA said. “Yet many people have become wealthy through ownership of rentals. It depends on both your personality and the underlying figures.”’ EcoVap Revolutionary new steam cleaning system from Switzerland — fer both domestic and commercial uses. *Ecologically safe —- N@ CHEMICALS * Hygienic — sanitizes as it cleans “Economical — saves time, eneray, and money! Just a few of the applications: cleans bathtubs, ovens, carpets, floors, car upholstery, walls, windows, defrosts freezers, strips wallpaper, ceramic tile grouting — even irons your clothes! For further information contact Oxca International Enc. (exclusive importer of "EcoVap”) $1,395 Phone (604) 929-2221 (plus tax) Fax (604) 929-8242 DUM, TOGETHER WE GIVE CCNADIANS AN GUTSIDE CHANCE. 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