The prospect of becoming a landlord who owns multiple properties and rakes in residual income, while the properties pay themselves off and you increase your assets & net worth is often something that home owners, or even first time home buyers think of.
How could they not? With motivational leaders like Robert Kiyosaki and the shows on HGTV such as "Income Property" that focus on creating and building a residual real estate empire - it almost is made to seem too easy.
Buy property, renovate it a bit, rent it out, ???, profit.
Seems like a great potential to grow your money, net worth & assets - HOWEVER there's more to being a successful landlord, than just finding a tenant - that is, if you're cut out to be a landlord to begin with!
You've always heard the cliché? "location, location, location!" from Realtors or any Real Estate investors as one of the primary deciding factors in their purchases. This is imperative for rental properties as well. Proximity & ease of access to the following are very important, to ensure your property is on the shortlist of any potential tenant:
Zoning & legal considerations of the property
Please understand this: most properties in the GTA are zoned as single family residential. From a legal perspective, it is illegal to rent a basement apartment, or rent a whole house to multiple people/families - unless your property is zoned as a multi-dwelling unit. If you purchase a property that is already zoned for multi-dwelling (your Realtor should be able to advise you), there is no legal risk to you. If you purchase a property that is zoned as a single family residential and rent out the basement - you are taking a risk from a legal perspective, and in the case of any complaints or mishaps where the city gets involved - you are at risk of hefty fines, as well as emptying the rented area.
This is something that is almost NEVER discussed on the HGTV shows, however it is something any investor needs to be aware of, as renting a single family residential property to multiple families (including if you live on the main floor and the tenant lives in the basement) is a risk.
On the plus side, many municipalities such as Toronto and Mississauga have an application process to revise the zoning to multi-dwelling - however it will incur costs as specs must be to code and your property tax WILL go up.
Now on to the financial aspect of things - is your potential income property going to make you money in the long run, or will it be a money pit where you'll end up being house-poor & frustrated?
Come to terms with the reality of the current market - chances of raking in a good chunk of change within a year or two of your property purchase may not necessarily be possible at the moment, as the property market is still experiencing certain turbulence in market prices, correcting after an historical peak market in May 2017. From June 2017 till date, there have been several corrective implementations introduced by the Provincial government as well as the banks, such as the foreign buyer tax, increased qualifying rate for the mortgage stress test, and several mortgage rate increases. Since June 2017, there has been a mostly downward trend in the overall market in terms of sale price.
This is not the same property market from a decade ago, which many investors enjoyed - where property prices were experiencing an uptrend from 2008 onwards and from 2012 till 2017, had an almost vertical graph of appreciation in prices.
If your goal is to get a property to flip within a year or two - there's a high chance you may be setting yourself up for disappointment and financial failure - as there's no surety as to how the market will play out in the next couple of years. That's not to say you can't still profit from the current market in terms of rental income. If you're smart about it - you can still profit up until you decide to sell the property (may be a few more years of holding the property than you'd like, but not at a loss)
The basic financial considerations of a successful income property is: Rental income should be greater than your carrying costs. What I mean by carrying costs is: mortgage payments, property taxes, insurance, maintenance budget (things break down, need some repair), maintenance fees (for condominiums), and utilities (in case your rental rate is inclusive of utilities)
With the current state of the market, still coming off it's peak, and in the case of Condo Apartments - still being at it's peak - chances are that your current rental income may not be greater than your carrying costs - however, not to despair. Upon studying the rental stats of the area, and considering rent rates don't go down on a year over year basis - being in a negative cash-flow for $100-$200 should still be fine in the grand scheme of things as:
- You're still building your net worth & assets at a "fixed deposit" of $100-$200 per month
- As rental rates increase, that gap should close and may be zeroed out, or in an ideal case, will become cash-flow positive.
As you are looking for properties, you can work with your Realtor to help with calculations to ensure that you're making a financially sound decision.
Knowing your rights as a Landlord & respecting the rights of the Tenant.
Now that you're settled with the finance bit and have come up with a potential budget for which you'd like to purchase your income property - you need to familiarize yourself with the Residential Tenancies Act, or RTA. This is a provincially regulated act that lays out the rights and responsibilities of both the Landlord & Tenant. Unfortunately, there are several portions of the Act that are misunderstood or completely ignored in practicality - which is why it's often said that Landlords get screwed when tenancy issues go to the LTB (Landlord Tenant Board).
Did you know, that as a Landlord, you are not allowed to do the following?:
- You cannot kick out a tenant for bringing a pet into the property, after their tenancy begins - regardless what your lease agreement says. This isn't the case in condos or cooperative housing where the condo or co-op by-laws may restrict pets, which is also noted within the RTA
- You cannot DEMAND post dated cheques. You may request them, and if they tenant wishes to oblige, they may choose to do so - however you cannot threaten to terminate/evict or anything else if they choose not to provide post-dated cheques - as long as they're paying their rent on time.
- You cannot DEMAND a security deposit to cover for damage.
You can access the RTA for Ontario here: http://www.mah.gov.on.ca/Page137.aspx
Or you can download a PDF copy here: Bit.ly/RE4Lontariorta
For a full understanding of the RTA and your rights & responsibilities as a Landlord, including the eviction process (if it ever needs to come down to it), we can discuss when you're ready to take the next step - or you can email me questions directly and I will get back to you with responses based on the RTA.
I have assisted my clients with the eviction process and it is not as clean cut as it may seem.
So now that you're all familiar with the Zoning caveat, Location, Finances & the Residential Tenancies Act - let's buy a property!
Not just yet...
More considerations that we'll touch on in the next part will be:
- Renting a unit within the same structure of personal residence
- Renting an independent unit
- Renting a unit occupied by multiple tenants (main floor & basement rented separately)
- Property maintenance (grass/snow/etc)
- and more...
If you liked what you've read so far, please share with your friends - if you would like to discuss more about purchasing a rental property as well as aspects of being a Landlord that I haven't covered in this blog post - please email me and I will gladly set some time to discuss with you.
Thanks again for reading, till next time - Keep it RE4L.
Sales Representative, CENTURY 21 Titans Realty Inc. Brokerage
Real Estate Negotiation Expert, Real Estate Business Institute