Thinking of Becoming a Landlord? Here Are 4 Things to Consider!
1. Location, location
The location is very important to attract a large pool of quality tenant prospects. Consider access to public transportation, distance to laundromats (if the property does not offer in-suite laundry), and distance to schools and amenities.
2. The Property Itself When purchasing an investment property, you will want to check to ensure the current use is valid. If it is a multi-unit property, is it registered with the town as such? Are the separate suites legal? Secondly, a home inspection is highly recommended to ensure you know exactly what you are getting into. A second property, like any, will require maintenance and repairs at one point or another, but it is important to mitigate large upfront costs that will impact your cash flow. Having an inspection will give you a clearer idea of what to expect with the property.
3. Tenanted or Vacant? This is a common question. Is it better to buy a property that is currently tenanted, or vacant? With Ontario’s Residential Tenancy Act, if you are purchasing a tenanted property and intend on using the property for rental purposes, you MUST assume the current tenants and their existing lease rates and terms. So, it’s important to understand who, and what, you are assuming. If the property is currently tenanted, find out as much as you can about the tenants and get it in writing. Your lawyer can assist your realtor with drafting appropriate clauses to protect you when assuming current tenants. Sometimes the tenants have lived there a while and are not paying current market rent. Ensure you calculate these rents into your cash flow analysis before offering. Consult with your lender to review the numbers.
If the property is vacant, this allows you to renovate/update the property before you find tenants, which could increase your rental rates because the property would be looking it’s very best. This also allows you to collect current market rents. You will need to factor a few months vacancy into your budget to allow for the renovations and finding tenants.
4. Cash Flow You no doubt purchased an investment property to make money. Typically, rental properties offer long-term gain and possible short term positive cash flow. In a perfect world, your lease rates will cover your 1) Mortgage, 2) Property Tax, 3) Property Insurance, 4) Utilities (if applicable). Anything leftover is an added surplus called ‘positive cash flow’. This extra cash should be set in a separate account to save funds for repairs and vacancies. Your lender can help you crunch these numbers accurately, so you have a good idea of what your monthly cash flow looks like. An important factor to consider – what if your cash flow is negative? Meaning, what if by the time all the bills are paid, you still have to pay something out of pocket? Let’s say its $100 per month. Think of it this way – you are investing $100 per month into a high-performing stock that gives you a return of at least 5% per year. $1200 total on a property that conservatively goes up in value by a lot more per year. For example, a $500,000 house with a 5% appreciation per year, that is $525,000. Your $1200 is supporting a $25,000 growth which is an ROI that is hard to find!
While being a landlord can be rewarding, it is not without possible challenges. Be sure to do your research before you take on the responsibility!
Written by Deanna Hutton (firstname.lastname@example.org)