In its simplistic form, a rental property allows you to leverage a relatively small amount of money to own a high-valued asset. Better still, payments made against the mortgage are made by someone else—your tenant! And, then there are the tax deductions…

Once you’ve set your mind to real estate investments, the next question is how to do it:  Here are the pros and cons of investing in a a secondary property as a dedicated rental:

A dedicated rental property

A dedicated rental unit can be a condo apartment, a house, a multiplex or a home converted into multiple-units or rooms. No matter how it’s configured, a dedicated rental property is a real estate investment where the owner does not live on the premises.

Much like a suite in your home, a dedicated rental property allows you to deduct capital expenses as well as ongoing expenses.

However, there are two main differences with owning a dedicated rental property:

You are off-site

Not being present at the rental property has its benefits but also its drawbacks. While tenants won’t end up knocking on your door in the wee hours of the morning looking for the coffee maker, it also means you’ll have to be far more diligent about screening and vetting each guest or tenant before they enter your premise.

It’s a hard lesson a young Calgary family learned last year. In an effort to earn a bit of extra cash, Mark and Star Stark decided to vacate their family home during a weekend in August and rent it out to guests found through Airbnb. Within hours of the guests arriving, there was a raging party. Worried, the Starks drove back to their home only to be told that they had no legal right to evict the paying guests. By the end of the weekend there was close to $70,000 in damage done to the home. While this cost was completely covered by Airbnb’s host guarantee insurance, it was still a frustrating and tough lesson.

You will be pay capital gains tax on the sale of this property

According to the CRA, when you sell your home, you won’t have to pay capital gains tax because your primary residence is exempt. (It’s known as the Principal Residence Exemption.) For landlords with an income suite in their residence, this means you get the benefit of extra cash flow and don’t have to pay the tax authorities when you sell the property.

But all other property — known as secondary property — is subject to capital gains tax. Cottages, rental properties, your current spouse’s former home— all of this is considered secondary property and is subject to pay capital gains tax once the property is sold.

While no one loves to pay tax, you should consider this cost as part the cost of investing to grow your net worth. For instance, if you were to invest in a portfolio of stocks, you would be transaction costs (known as trading fees) as well as a variety of taxes: interest, dividend, as well as capital gains tax.

The good news is that capital gains tax is one of the more favourable taxes under the Canadian tax rules. Here’s what I mean:

If you were to earn an annual income of $100,000, while living and working in Ontario and assuming no deductions, you would pay approximately $24,400 in taxes.

Let’s assume that, as a landlord, you earned the same amount as profit from the sale of your dedicated rental property. Assuming no other income or deductions, you would only pay $8,800 — for a tax savings of $15,600. That’s significant.

What type of rental investment should you choose?

Historically, real estate is a reliable investment option. However, becoming a landlord is a tough choice. You need to choose the right type of rental property and the right tenant to suite your time and budgetary constraints. By doing the research and legwork to figure out the best situation for you, you can certainly find an investment strategy that aligns with your goals. Then, it’s just a matter of time before you see some appreciable gains in your personal net worth.

Romana was nominated for a 2015 SABEW Business Journalism award, won Gold in the 2014 CPA Finance Reporting award, was nominated for a 2011 National Magazine award and a 2010 KRW Business Journalism award. As editor, Romana helped CI Top Broker obtain its first KRW Business Journalism nomination and in 2011, Romana was part of the team that helped MoneySense win Magazine of the Year at the 34th annual National Magazine Awards. While Romana has extensive experience working in print and providing custom editorial, she’s spent as many years in the online space and as a guest on various television shows, including CityTV News, iChannel and Breakfast Television.