Have you been thinking lately that a residential rental property could be a good boost to your investment portfolio?
This can be a very lucrative opportunity, but a first-time investor might miss some land mines that could obliterate your returns. Here are some important things to consider when shopping for an Ottawa investment property.
1. Do Your Homework
Start your search by speaking with a financial advisor because there are many hidden costs of buying a home. A financial advisor will be able to go over the types of investments available to you based on your budget and lifestyle.
For example, different types of rentals will have different carrying costs based on their location or size. Once you’ve done that, the next step would be to turn to a reputable real estate agent.
A reputable real estate agent is key here as you want someone with excellent knowledge in the investment property field to guide you in a purchase. One will guide you through the entire home buying process.
They should be able to provide critical information such as capitalization rates (also known as cap rates). Cap rates are the ratio of Net Operating Income (NOI) to property asset value.
For example, if you are looking at an investment property that is valued at $1,000,000 and it had an NOI of $100,000, the cap rate would then be $100,000 / $1,000,000 or 10%.
2. Will You Be Cashflow Positive?
Ontario is one of the hardest provinces to break into the real estate business, so you’ll need to have plenty of cash to get started. You should be sure that the rental income from your real estate investment will eventually offset your initial investment, and not simply put you further into debt.
Buying rental property will allow you to earn considerable net rental income, but you should do your research before buying. Purchase price alone is not the only factor; you’ll also need to consider closing costs, property value, maintenance costs, legal fees, and other expenses that come from owning property. If your rental properties end up costing you more money than expected, you run the risk of running a negative cash flow.
Factor in how much property taxes are to your financial plan. Some neighbourhoods will have higher property taxes than others – however this is not a bad thing! Some neighbourhoods will attract long-term tenants and therefore can combat the higher property tax.
You can speak either with your real estate agent or an assessment office to get a taste of what current property taxes are like as well as what increases will look like in the near future.
3. What Kind of Property Do You Want?
A lot of first-time buyers want to start with something smaller like a condo or townhouse, but if you’re able to spend more at the start, a multiplex unit will generally be more cashflow positive.
It is important also to take note of the type of tenant you can expect based on the location of the property. Purchasing an investment property near a university will likely yield students as your tenants.
Students will likely live with friends and so one unit can be rented out to multiple people. A property in close proximity to a school will more than likely be of interest to people with young families. The value of your investment property will be directly related to how close it is to a good school.
4. Be Aware of the Vacant Home Tax
At the end of March 2023, vacant Toronto residences will be levied an annual Vacant Home Tax. A property is considered to be vacant if it’s not being used as the primary residence by the owners or any permitted occupants for the last six months.
If you’re considering purchasing rental real estate to use as a temporary lodging (such as AirBNB or VRBO), you’ll need to take into account the extra expenses incurred.
5. Consider the Condo Fees
Many wonder if condos are a good investment. But one thing to consider is the condo fees.
Condos are often far more affordable than single-family homes, and will likely have fewer maintenance costs. The downside is that you’ll have to pay monthly dues, and there’s the potential for expensive special assessments.
Be sure to do your homework on the homeowners association and condo board, as well as the overall condition of the building and the unit itself.
6. What are the Mortgage Costs?
Unlike the mortgage you took out for your primary residence, getting rental property mortgages can be more complex.
Most buildings with 1-4 units are zoned residential, so similar qualifications and options will apply. However, buildings with 5 or more units are commercial, so any lender will require a commercial mortgage, which comes with tougher criteria to meet and higher interest rates.
The down payment will be different, depending on whether or not you plan to live in one of the units. Non-owner occupied rental properties require at least 20% down, whereas owner occupied buildings require 5-10%, depending on how many units are in the building.
7. Are You Willing to Be a Landlord?
While buying an investment property is a good way to earn some extra income, it does come with a lot of commitment that could affect your personal life. Collecting rent from reliable tenants is one thing, but your monthly income might not be so reliable if you run into unexpected expenses, have to look for new tenants every year, or have to sell real estate to maintain positive cashflow.
You will notice that the location of your investment property will be dictated by how involved you want to be in the investment property.
If you intend to actively manage the property, you will want to live close to your investment property.
If you want to be a bit more removed, you can hire a property manager and you can live further away. However, hiring someone to manage the property will be an additional cost.
You’ll need to be aware of Ontario’s landlord-tenant laws, as both parties have rights and responsibilities when it comes to security deposits, lease requirements, and housing laws.
8. Other Risks of Owning a Rental
A property is only as good as its amenities. This does not necessarily relate to condos, whose amenities are in the same building as the unit. It is important to tour the surrounding neighbourhood and see how close your property is to parks, restaurants, gyms, movie theatres, public transportation links and other perks that could attract renters.
As a landlord, you’ll be on the hook for any property maintenance costs, such as a broken water heater, that could arise.
You’re also responsible for properly vetting potential tenants, and if they end up damaging your property, you might not be able to fully recoup those costs.
Get A Real Estate Agent Who Knows Investment Properties
There are many things to consider when looking to purchase a rental property: future development, number of listings and vacancies in the neighbourhood, average rents, job market and crime rates on top of what we have already discussed.
If you would like to learn more about things to consider when looking to purchase a rental property, please reach out to the Paul Rushforth team. I’d love to help you find an investment property that suits you and your lifestyle best while generating passive income!