What To Consider Before Buying a Rental Property
Rental properties can be a wise investment for some people. Rental properties have the potential for increasing your net worth and giving you extra income. They also have a tax benefit, as you can claim all of your business expenses (including everything listed in the “costs of being a landlord” section in this article) on your income tax. With a rental property, you have the potential for a high return on investment with appreciating property value.
But before you go rushing out to get a mortgage for a rental property, there are a few things to consider. It’s not an investment for every person and there are risks involved. Take a look at what to consider before buying a rental property so that you can determine if being a landlord is the right choice for you.
Do The Research
You’re going to want to make sure that you’ve put in the research needed as you consider buying a rental property. Check to see what rental rates are going for in the areas you’re looking to purchase. Make sure to pay attention to whether those rental rates include utilities, snow removal, etc. And remember to look at not just the number of bedrooms, but also the square footage of the places, parking spaces, backyard, and amenities in your research.
You might want to consider doing research into several different cities and neighbourhoods to see what would be the best option for you to purchase in.
Check out the local bylaws. Do they have restrictions for rental units? What would you need to do to have a rental property in that city? Where you live matters–whether you live in the same city as the rental property or not could result in different rules. Research to see if the city you want to buy in is thriving or not.
Connect with your mortgage professional to see what kind of mortgage you’d be able to get and the kind of rates that you’d be looking at.
Costs of Being A Landlord
There are many costs of being a landlord to consider. It’s a good idea to have a general idea of how much these things would cost you so that you can better understand if it’s worth it. Those costs include your mortgage, insurance, land tax, income tax (as it’s considered a business), utilities, property and house maintenance, as well as management fees (if needed).
Of course some of these things you can have your tenants cover themselves, such as utilities and property maintenance, but the rent price will need to reflect that.
Do The Calculations
Is it worth it? That’s the biggest and most important question if you’re considering buying a rental property. You know it’s going to take work, but when it’s all said and done, is it worth it? It’s time to get into the nitty-gritty of the calculations to figure out if you’ll actually make money off of it once everything is said and done.
You’ll need to figure out what the mortgage will be, what reasonable rent is going for in that area, and the additional costs mentioned above. Will rent be able to cover it all? Don’t forget to factor in things like mortgage rate changes and potential months where your property could be sitting empty when one renter leaves and you need to find another.
Long Haul
Being a landlord isn’t a short-term get-rich-quick scheme. You have to be in it for the long haul. You’re going to be putting the money that you get from rent back into the property. Does that work for you and your life goals? The nice thing about rental properties is that once the property is paid off, you can either sell the house or most of the rental money that comes in will go straight into your pocket. But that is 20-25 years down the road, so it’s important to keep that in mind when considering this option.
Location, Location, Location
Some neighbourhoods are more desirable than others for owning a rental property. In more affluent neighbourhoods, you can charge more for rent, although the demand might not be as high. In other neighbourhoods, there is a seemingly endless supply of renters, but the rent is much cheaper and you might run into more issues with tenants. The sweet spot, of course, is the middle ground.
Look for neighbourhoods that are close to schools, hospitals, public transit, and stores. These neighbourhoods often attract families that are long-term renters and have a decent amount of renters vs homeowners, which means that your rent is often well priced.
Bad Tenant Risks
Especially in Ontario, landlords don’t have many rights and evicting a bad tenant can be a nightmare. Having a rental property means running the risk of facing things like tenants that won’t pay and having to take them to small claims court, damage to the rental property, and more.
The good news is that most tenants are just people looking for a nice and affordable place to live. If you do buy yourself a rental property, make sure that you do yourself a favour and put in the time and effort to find the right tenant. You can do credit and background checks on any applicants. Always ask for references and actually call and check with those references. Make sure to also meet the applicants face to face so that you can get an idea of what they’re like.
Make sure to create a rental agreement and have a lawyer take a look at it before signing it and asking your tenant to sign it.
Time Costs
Even though technology has made things like collecting rent much easier, it’s still a good idea to consider the time costs of being a landlord. You’ll need to put the time and effort into marketing your property well. This means taking high-quality photos, posting in multiple places, and fielding a ton of questions and walk-through requests.
Then there are time costs of things like home and property maintenance, as well as yearly inspections. Speaking of inspections, you’re legally allowed to do them once a year, and I highly recommend it to make sure that there are no property damage issues or legal issues happening in your home. If you can’t do it yourself, there are companies that you can hire to perform them for you.
Final Thoughts
For some people, buying a rental property is an incredible investment in their future. The rent that they collect covers the mortgage and costs and by the time they’re ready to retire their property has appreciated and they have a beautiful little nest egg that they can sell and retire on.
If you’re interested in buying a rental property and have considered everything we’ve mentioned here, then it’s time to contact a local real estate professional to help you find the perfect property! Our team is ready and excited to help you on your journey.
