Becoming a landlord can seem very appealing.
But before you dive headfirst into this potentially lucrative pool, there are some things to consider. Aren’t there always?
Down payment – you will need at least 20% of your own resources to put down. That can be a lot of money. On a $300,000 property you will need $60,000. On top of this you have the other costs to complete the purchase such as legal fees, title insurance and potentially mortgage insurer fees. Some lenders will still utilize the mortgage insurers to lessen their overall risk and on a rental property that cost is passed onto the purchaser.
Ongoing costs – landlording is not a passive investment and like any fledgling business it will have to be nurtured to pay out. You haven’t just purchased a property: in reality you have purchased a business.
The first cost to consider is your time.
You will be the one responsible for the repairs and maintenance on the property. These calls can and will come at the worst of times. Make sure you and your family discuss this beforehand. It’s all well and good to imagine a family dinner will be interrupted but now imagine that call coming in Christmas Day. You will also spend time interviewing tenants, chasing rent, going to the bank and a million other myriad of details.
A property management company can be a great way to mitigate this but this could eat into your cash flow up to 10%.
And then there is the cost in dollars.
You will want to budget 2% of the purchase price per year for ongoing monetary expenses.
On the same $300,000 purchase that’s $6,000/year. There will be ongoing costs such as your mortgage, property taxes and insurance but as we all know owning a home is expensive.
There is always the risk that you will have a major expense such as the furnace or a new appliance. And what if your tenant doesn’t pay or the property sits vacant? Having a sufficient buffer protects you from paying these personally.
Budget – sometimes people come in thinking that as long as the mortgage is covered they will be fine to pay the taxes and other expenses out of their own pocket. I would caution a big no!
Your rental is a business and no business can, nor should it, operate in the red. Sit down and calculate exactly how much you will need to charge each month to be viable.
Will the rental market in your area support the rental amount you need to charge? Have you allowed for all expenses and a buffer?
Banks have excel spreadsheets they use and exact ratios worked out. Ask your mortgage professional to help. We are happy to!
Learn your rights as a landlord. The Landlord Tenant Act is different from province to province. Know yours before you buy. There will be things expected of you as a landlord that you may not be aware of but that you are now legally obligated to fulfill. It’s equally important to know your rights.
Think worst case and plan accordingly. How do you evict? What is the process for increasing the rent? You need to know.
Know the tax implications. Rental income is income like any other and will need to be reported to the CRA.
Having a qualified tax professional on your side can help you avoid short and long term consequences. For example if you have a legal suite in your primary residence you will want to be aware that there could be a capital gain tax implication when you sell.
Use your tax professional and let them know your plans with your rental property so that they are able to help you strategize.
Be realistic. Not every tenant will be perfect. We have all heard the stories. Your investment may take up to 10 years to be financially viable and in the meantime your blood sweat and tears are likely to be needed.
Are you ready?
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.