Buying an investment property is a popular option for many Canadians looking for different ways to invest their money. Rental properties can provide you with steady monthly income and could appreciate in value over the years. But are you cut out to be a landlord?

Finding the right property

Finding the right property as an income producing investment is important. Do your homework. You want your rental to be attractively priced for your local market, and in a quality neighbourhood.

Related: How to invest in real estate

Consider a property that allows for multi-revenue, such as renting out the top floor and basement to different tenants.

If you’re handy you might consider a fixer-upper close to your home to renovate and maybe add a basement apartment.

Buying a property

To get approved for a mortgage you must put down 20% of the purchase price. Your mortgage lender will consider your credit score, income sources and market value of the property, just as with a personal mortgage. However, the key factor will be whether you can generate enough cash flow from the rental payments.

Before buying a property, you should scan the classified ads and websites like Kijiji to determine what you can reasonable charge in rent. The rental income should be enough to cover all of your operating costs – mortgage payments, utilities, maintenance, insurance and property taxes – and generate income as well.

Related: Leveraged investing – A guide for those who can’t help themselves

One suggestion is that you get an annual return of 6% to 9% of the amount you have invested. For example, if you buy a property for $300,000 and have a down payment of $60,000, your goal should be to pocket $3,600 to $5,400 per year after operating costs are covered. Be realistic. Will the rental market allow you to charge enough to cover that?

You should have at least three months of mortgage payments and other expenses in savings (or line of credit) as a buffer in case the property is vacant, or the tenant doesn’t pay.

Challenges of owning a rental property

You have to ask yourself if you are prepared for the day-to-day grind of looking after a property – dealing with tenants as well as trades people that can provide you with service for a decent price.

The biggest challenge is finding the right tenant – someone who pays the rent on time and doesn’t abuse the property.

When interviewing potential tenants, check their credit and job status by asking for a pay stub, credit report and references. Also, call previous landlords.

Repairs and maintenance can be expensive and time consuming, especially in an emergency situation.

You may consider doing away with these problems by hiring a property manager. They can do background checks on potential tenants and take care the 3 a.m. clogged toilet. This option will eat into the your monthly rental income, though.

Tax considerations

You must pay tax on your rental income, but you can deduct from that income certain expenses related to the property including:

  • Mortgage interest
  • Property taxes and home insurance
  • Advertising for the right tenant
  • Fees for professional services – legal, accounting, property management
  • Maintenance and upgrades
  • Utility bills (if included in the rent)

If expenses exceed your rental income (perhaps in the first year of ownership) you may be able to deduct the loss from your other sources of income.

Related: Managing proceeds from a rental property sale

When you sell your property 50% of the capital gain is added on to your income.

Would you make a good landlord?

Check to see if you have these traits. A good rental property owner:

  • Enjoys doing small home improvement projects.
  • Has the spare time to deal with problems and emergencies as they arise.
  • Doesn’t mind having occasional difficult interactions with problem or demanding tenants.
  • Has sufficient liquid assets to cover expenses if the rental is vacant.
  • Doesn’t have the majority of his or her net worth tied to real estate.

Final thoughts

Real estate is not a liquid investment. It can take time to sell and market conditions could be unfavourable.

Most successful landlords regard real estate as a long-term investment. You enjoy a steady stream of rental income while your mortgage gets paid off, building equity all the while. Then, if the market is good you can sell, or continue to enjoy your rental income indefinitely.

Owning rental property is a good option for some people. Keep your eyes wide open to better understand the risks as well as the rewards.

Print Friendly, PDF & Email

15 Comments

  1. Avery on March 15, 2016 at 9:00 pm

    I’ve noticed quite a few friends and coworkers after buying a new house also held onto their previous home for the purpose of a rental property. I suppose that would take the guesswork out of finding the right property and location, since you would have done that when you originally bought the place. You’d also know all the ins and outs, maintenance-wise, so that’s another plus.

    I’m not sure how the mortgage rules would apply in this situation, though. Since you’d be buying a new residence for yourself, would you need to leave 20% equity in the home you plan to keep as a rental?

    • Dan on March 15, 2016 at 9:39 pm

      @Avery this is the situation we were in; we moved into a house from a condo and notified the lender. They noted it on their records but aside from that there was no change whatsoever and no minimum equity requirement, the mortgage renewal was quick and easy. It would be a different story if buying a property with the intention of renting it out from the start. Overall the rental side of things has gone quite well but this is mostly due to having great tenants. I’ve learnt the tenants can make life really easy or very difficult.

      One point that isn’t mentioned above – the capital gain (if any) for those who originally lived in the property and then rent it out is based on the gain in value from when the property became a rental to when it was sold. When the owners move out and they rent out the property CRA considers this a “change in use” which is a deemed disposition, and this means any increase in value beyond that point is taxable (prior to that point it’s not taxable as a principal residence). There is also the issue of Capital Cost Allowance (CCA) to consider for those who have claimed it which affects the taxes when selling.

      • Cool Koshur on March 16, 2016 at 5:25 pm

        @Dan
        You bought up a interesting point. As you say when change of use happens how would you find the true market value of the property at that time. How does CRA concur with this TMV? Do you inform CRA that there is change of use and x amount of dollars in TMV at that time.

        • Neill on March 18, 2016 at 7:22 am

          I would recommend that you check with your accountant for an opinion. Thirteen years ago, we got our realtor to create a CMA (comparative market analysis) with an opinion of value – and we were advised that we did not need to get it formally appraised at the time. We have heard similar opinions in the years since. YMMV

  2. Jaymee on March 16, 2016 at 5:12 am

    My partner and I are in the process of buying our first home – and we’d like to be able to build in a basement unit to rent out, or if we find one with the right zoning, build a garage with a suite on top.

    Due to these requirements however, it’s made our search more difficult and a bit frustrating. I sometimes think we should just buy a condo to be done with the house hunting and then rent that out in the future when we move to a different house. I’m wondering what’s the best way to get into real estate rentals.

    • Peter Crisp on March 16, 2016 at 9:29 am

      Two things to consider. First, you must have the right zoning. Second, look for, or build, a suite with the proper fire separations and other things to make the suite legal. We retrofitted our house to be legal. It’s not cheap, but the house is quiet and the fire separations etc. are there to keep everyone safe. I don’t know where you are looking. In BC, many places don’t have basements. If you are in the area, look for a house with, ideally, a walk-out basement. You could also simply share a suite but I don’t think this is the best set-up for most people. Finally, you can buy a condo/strata but generally, as income properties, the strata fees and other restrictions make these less attractive as income properties and you have to do your research to see if any restrictions are in place, or could be put in place, against renting.

      • Jaymee on March 16, 2016 at 7:49 pm

        I’m looking in Calgary. We’ve been looking for a detached home with a basement and/or a big enough lot with the right zoning under our budget. Its been hard to find this type of house with all those requirements that we like – but I guess we keep searching. Good to know about condos – I thought it might just be easier to get into them but maybe easier doesn’t always mean better 😛

        • Peter Crisp on March 16, 2016 at 8:06 pm

          Calgary has been a very hard place to buy property because it’s been a great market for landlords. With the softness in the oil patch, it’s a good time to shop and you may find some opportunities that weren’t there before. I don’t know how long the window will be open – it all depends on the price of oil. Good luck house hunting!

    • Neill on March 18, 2016 at 7:18 am

      The recent changes made by the City of Calgary with regards to secondary suites has definitely opened up a lot of options for adding legal suites. I would highly recommend:
      1) Investigating a REA (full disclosure: we have been members of REIN (Real Estate Investment Network) Canada since 2007 – they do not sell you developments, land or any other “run to the back of the room” type seminar stuff, rather, they teach the business of the business. How to filter properties from an investment perspective, how to renovate for success, how to screen prospective tenants, etc etc). We quit our full time employment over two years ago, and are now full-time investors
      2) Finding a real estate agent that is familiar with the current Calgary rules with regards to suites, and understands revenue property. I would recommend this route (suited house) versus condo. You will get better return on your investment in the long run – especially if the property has a double detached garage. Sean Bruce-Hayes has provided a wealth of knowledge to REIN members, and follows and is involved in the YYC suite updates. (We do not deal with him personally, as our holdings are in Airdrie…)

      Best of luck in your quest – a “breather” year in Calgary should definitely help your situation. (And yes, we are actively on the hunt ourselves)

  3. Justin on March 16, 2016 at 7:32 am

    I used to run a campus residence so I have some experience dealing with tenants…you need to find a good one or else you will have headaches. Families or young professionals are usually a good bet though.

    Another thing to keep in mind is rent control. In Manitoba is regulated which is fine, but it can be restrictive if you have unexpected costs come up.

  4. Cool Koshur on March 16, 2016 at 5:43 pm

    In GTA, basement rentals is lot of work and headache if you go legit route which I personally think is right way to go. First is zoning, does your city allow basement apartment in your neighborhood. If not, then case closed. If allowed, then you will need to build the apartment to code with fire separation barrier, two exits and separate entrance. It costs lot of $$$ to build basement to code. To recover your build cost it would on average 5 years. Some municipalities e.g Oakville ON, don’t allow apartment to be more than 40% of the residential floor area of the detached dwelling or semi-detached dwelling or 806 sq. ft. You also need to provide parking space for tenants. Your home insurance & home assessment will increase, meaning you will pay more in property tax. Once you have legit rental unit. Biggest challenges being a landlord is finding the “right” tenants.

    Bottom line, being landlord is not for everyone.It is lot of work

  5. 12-Minute on March 16, 2016 at 5:49 pm

    I’m kind of jealous of people who have the landlord fiber as I see real estate as a good way to diversify.

    Grasping the financial aspects of it would be easy for me but I’m not very good with my hands or as least the renovation use of them. The gentle guy in me wouldn’t be very effective at collecting rent every month either. I don’t think it would be a good idea to delegate these essential landlord chores.

    So for now, the only viable option for me would be to do it with a complementary partner.

    Still, one of my friends has been a landlord almost all his adult life and it has worked out very well for him and his family. Both he and his father are born handymen and were lucky to retain very good quiet tenants. You might argue that they simply took good care of them.

    • Neill on March 18, 2016 at 7:08 am

      While being good at small jobs can be an asset, it should not be a deterrent either. I am among the least handy people out there. It actually worked in our favour when I was working full time (we are full-time RE investors today) – we paid folks to do the work, which meant it was typically done better, and with my opportunity cost factored in. A great relationship with a handyperson becomes essential.

      And you can also hire property management, but I highly recommend learning it yourself first, in order to be able to hold them accountable

  6. Peter Crisp on March 16, 2016 at 8:27 pm

    I started taking being a landlord seriously about 5 years ago. It’s still a spare-time thing. It’s slow wealth (or risky and fast like flipping). There are ways to make investing easier such as using a property manager/management firm if tenant management isn’t your thing (it’s not mine!). I use one for every property so I can lever my best skills to more properties. Have a basement suite or a duplex is a good start (and yes, a legal suite from scratch will easily be $20,000 and often much higher). At this particular moment, returns are really low pretty much across Canada, because lots of people have jumped in and there isn’t much room for error. You really have to be careful and have something unique to offer or else it’s easy to lose a lot of money. Better in that case to just buy a REIT, sleep at night and have no regrets. I like buying, fixing and improving properties to make them safe, energy-efficient and a delight for the tenants and when it goes well, it’s very satisfying. When it’s bad, it’s head-pounding.

  7. Tommy on March 18, 2016 at 11:04 am

    We consider buying a rental property or converting our current home to a rental and finding/buying our dream retirement home. You have pointed out everything to consider and we have been hitting on all of them in our decisions. Although I am handy for repairs the only way I would do it is with a property management company handling the tenant end of the business working as a buffer between me and the tenant. I have a buddy who does this and based on his experience renting out a condo here in Colorado and all the issues with tenant screening, payment collection, laws, regulations, rights, etc. I would prefer to let the pros handle all of that. Also the Cost seems worth the freedom from middle of the night phone calls. Part of our delay in doing it is these personal attributes of ours that really indicate we aren’t cut out to be land lords and probably should just go the REIT route. We are certainly conflicted.

Leave a Comment