Owning a Rental Property Allows You Three Advantages
Renee Huse, founder of Spire Mortgage Team in Alberta… if you’re thinking about using a rental property as part of your financial future, we’ve sat across the table from many clients just like you in Calgary, Edmonton, Airdrie and beyond, and we know it can feel daunting. You might worry about cash‑flow, tax rules, making the right move at renewal or refinance. We’re here to walk you through it.
When you own a rental property you get three big advantages:
- Somebody else (your tenant) helps pay your mortgage, so you build equity and wealth.
- You get long‑term appreciation—your property value may rise.
- You get real tax advantages tied to the rental income and the structure of the debt.
In this blog we’ll cover how this works in Alberta, how you can set it up the “right” way (so you don’t miss out), a practical case study, and what you need to watch for.
Here’s what we’ll walk through
- What are the three advantages exactly?
- How to structure your mortgages so the biggest debt sits on the rental vs your primary home
- Alberta case study: how a local family did it
- Comparing options: use of debt + risk + cash‑flow
- Glossary of key terms so you’re comfortable in the conversation
- Questions we frequently hear
What are the three advantages of owning a rental property?
1. Tenant helps pay your mortgage
When you purchase a rental property, you’re collecting rent. That rent goes toward your ongoing costs: mortgage payment, taxes, insurance, maintenance. Over time, the mortgage balance drops and you build equity. It’s like having someone else chip in monthly so you march toward full ownership.
2. Appreciation of the property
In many Alberta markets (Calgary, Edmonton, Red Deer etc.) property values trend upward over years (though they also go through cycles). That means the value of your rental property may rise, giving you capital gains when you sell (after tax). So you both (a) collect cash‑flow now (ideally) and (b) participate in long‑term value growth.
3. Tax advantages
Here’s where it gets interesting: Because the property is producing income (rent), the cost of generating that income is deductible. For example, in Canada you can claim the interest on a mortgage for a rental property used to earn rental income.
Conversely, the mortgage interest on your principal residence is not deductible. So the strategy becomes: ensure your “big debt” sits on the income‑producing asset so you capture the tax benefit, rather than on your home which gives you comfort but fewer tax advantages.
How to structure this in Alberta: “largest mortgage on the rental” strategy
Suppose you currently own your home free and clear (no mortgage) and you plan to buy a new home. You could simply take out a mortgage on the new home. But you’d leave your rental property mortgage‑free—and you’d miss the opportunity to use the debt on that rental where the interest becomes deductible.
Instead: take out (or refinance) the rental property so it carries a larger mortgage, then apply the proceeds (or equity) toward your principal residence. Why? Because the interest portion on the rental property mortgage is deductible (as an expense against your rental income) whereas the interest on your personal home is not.
Important caveats:
- The mortgage must be tied to the income‑producing property.
- Ensure your rental is genuinely producing rent and you track all your income/expenses properly.
- Cash‑flow matters: more debt on the rental increases your monthly payments, so rent should cover it.
- Qualifying rules: Make sure your file fits lender standards.
Real‑world example with numbers
Let’s say a couple in Calgary owns a rental property that’s generating $2,500/month rent and has a mortgage balance of $150,000 at 4.34% 5‑year fixed. Their personal home is free and clear. Now they want to buy a $650,000 home.
Option A: Mortgage on new home: $500,000 at 4.34%, leave rental intact.
Option B: Refinance rental to $400,000, apply $250,000 equity to new home, new home mortgage is only $250,000.
| Strategy | Pros | Cons | Cash‑Flow Impact |
|---|---|---|---|
| Mortgage on New Home Only |
• Simple setup • Rental property remains mortgage‑free |
• Missed tax deductions on rental • Higher debt on personal home |
• Larger monthly payments • All interest is non‑deductible |
| Refinance Rental Property |
• Mortgage interest becomes deductible • Personal home carries less debt • Builds equity faster in principal residence |
• Slightly more complex • Rental carries higher mortgage risk |
• Rental income offsets mortgage • Lower net interest after tax deduction |
Alberta Case Study: The Johnsons in Airdrie
Peter & Tara Johnson live in Airdrie and own a two‑unit property in Calgary. The suite rents for $1,800/month. Their current home is mortgage‑free. They plan to buy a new $550,000 home in Airdrie.
We helped them refinance the two‑unit for $300,000 at 4.34%, using the equity to put $300,000 down on the new home. Their new home mortgage dropped to $250,000.
Cash‑flow worked: $1,800 in rent mostly covered the $1,520/month mortgage. Their new home mortgage payment was around $1,380/month. It gave them control, lower personal debt, and a tax‑smart rental setup.
Glossary of Key Terms
- Amortization: The length of time your mortgage is scheduled to be paid off.
- Qualifying Rate (Stress Test): The higher rate you must qualify at to ensure you can handle rate increases.
- Rental Income: Money you receive from tenants, which must be reported as taxable income.
- Deductible Interest: Mortgage interest on an income‑producing rental property that can be claimed on your taxes.
- Principal Residence: Your primary home; mortgage interest is not deductible.
- Refinance: Replacing an existing mortgage, often to access equity or change terms.
- Cash‑flow: Your rental income minus expenses like mortgage, taxes, and maintenance.
- Equity: The value of your property minus what you owe on it.
Questions we frequently hear
What if the rental property doesn’t cover the mortgage payment?
It doesn’t have to be fully self‑funding. As long as you’re comfortable covering a shortfall (and have reserves), it can still be a good strategy. We stress‑test every scenario with our clients.
Can I deduct the entire mortgage payment on my rental property?
No. Only the interest portion is deductible — not the principal.
What happens if I take out a mortgage on the rental property but use the money for personal reasons?
Then that portion of the interest may not be deductible. The CRA tracks how the funds are used, not just where they’re borrowed against.
Does this strategy work only for large investors?
No. Many of our first‑time buyers and homeowners in Alberta use it. The key is understanding the risk and structuring your file correctly.
Do I need to be self‑employed to use this?
Not at all. Salaried clients, families, and retirees can benefit too — it’s about the mortgage strategy, not your employment type.
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