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Real estate done right a smoother investment

Real estate done right a smoother investment

Mike Grenby, Special To North Shore News

Published: Sunday, October 11, 2009

If you can't stomach the ups and downs of the rollercoaster stock market, your investment thoughts might be turning to real estate.

With the current climate of low interest rates, higher unemployment and still some worry about the future of the economy, you could well find a property bargain.

But check why it's a bargain. Good reasons include an estate sale, somebody who can't afford to keep the place, owners retiring to a smaller place. Bad reasons include undesirable neighbours or neighbourhood, problems with the house or land, negative future prospects for the area.

"Most investors who have made profits in real estate did so by taking on a lot of risk, worry and work," says Pat McKeough, publisher of The Successful Investor and other investment newsletters.

"They also went into it with realistic expectations and the intention of holding on to their properties for many years." Selling real estate can take time and cost quite a bit -- especially when values fall.

Investing in your own home provides the personal "yield" of a roof over your head, and any profit is usually tax-free.

That means if you invest your labour to improve the place and eventual sale price, in effect you are earning tax-free income. You can also claim tax deductions if you rent out part of your home or use it for business.

Investment in a rental property also offers tax benefits. You may deduct most of the major expenses including mortgage interest. And when you sell, you pay tax on only half of any capital gain.

But now the personal side -- in the form of dealing with tenants -- can prove to be a negative.

"Desirable tenants tend to stay put for five to 10 years so they are rarely in the market for new accommodation," says McKeough. "Bad tenants move much more often, sometimes with their rent in arrears. Because they are often back in the market for housing, bad tenants make up an oversized proportion of people who answer homes-for-rent ads."

Mike Grenby is a columnist and independent personal financial adviser; he'll answer questions in this column as space allows but cannot reply personally. E-mail mike@grenby.com.