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Rental properties are a great way to secure long-term investment and generate monthly income. That being said, there are many factors to consider before purchasing a rental property, from the responsibilities of being a landlord to the best neighborhoods for investment.
To help you get started, we’re taking a look at five of the most important factors to consider before buying your first rental property.
Owning a rental property means assuming the role of landlord.
So what is a landlord - and what are the expectations associated with this role?
According to Investopedia, a landlord is defined as: “…a property owner who rents or leases that property to another party in exchange for rent payments. Landlords can be individuals, businesses, or other entities.”
Landlords can be individuals, businesses, or represent government agencies and other organizations. The types of properties can vary as well. Investment properties come in all shapes and sizes, such as multi-residentials (i.e. condominiums), vacant lots and land, cottages and commercial properties.
Landlords and their tenants are bound by contractual agreement whereby the landlord will rent or lease property (either residential or commercial) for a recurring sum, under an agreed upon set of terms and conditions in accordance with official rights and regulations.
The responsibilities of a landlord will vary in scope and detail depending on the property in question, and the agreement between landlord and tenant. However, there are some standard responsibilities that come with the territory, as laid out under Ontario’s Residential Tenancies Act:
In accordance with provincial and city maintenance, health and safety standards, the landlord is responsible for repairs and maintenance on the home, excluding any repairs owing to damage on the part of the tenants (including any guests they may bring into the home).
The landlord is responsible for keeping all common areas clean and in good standing, including corridors and yards, and includes maintenance like snow removal from points of access to the property (driveways, walkways, etc).
Landlords are responsible for ensuring tenants have access to vital services like hot and cold water, heat and fuel and electricity. These vital services are to be maintained and accessible for the tenants and cannot be shut off - even if the tenants are in default on their rent. These services can only be shut off temporarily for the purpose of repairs.
Under the Act, landlords must provide for heat in the property between September 1st to June 15. In this window, the minimum temperature is 20°C, with these requirements varying in additional details depending on location. Via this municipality search, you can verify what specifics each location requires.
If the property includes air conditioning, landlords will be expected to ensure the central air is functioning for tenants as any other appliance that makes part of the home. However, if the property or unit did not come with an air conditioning unit installed, landlords are not obligated to install one.
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Landlords are responsible for providing their tenants with copies of necessary documents, such as the lease agreement, as well as written notice of the landlord’s legal name and mailing address, and if requested by the tenant, copies of rent receipts.
The above responsibilities are considered standard under the terms of the landlord-tenant relationship and cannot be modified or contradicted under any terms or conditions via verbal or written agreement.
While many landlords are situated within or in reasonable proximity to their rental properties for the purpose of convenience and access, some landlords may own the property but not live closeby. In this case, they would be considered an “absentee landlord”. While not uncommon, this is generally inadvisable, given the added risk of damages or negligence that may occur to the property - as well as the complications of squatters and the difficulty in eviction processes that may ensue.
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When it comes to purchasing your first rental income property, your down payment will be a major primary consideration in your purchase.
Down payment requirements for a rental property may be as low as 5% or as high as 20%, and generally depend on three factors:
Since April 19th, 2010, to curb risks in the market, Canadians purchasing a non-owner occupied investment property must make at least a 20% deposit on properties listed at over $500,000.
That being said, for the purposes of profit, the more money you can put down in your deposit, the better! Putting 25% down, for example, will mean making that money back the first year in equity. Also, the bigger your down payment, the lower your mortgage payments, which works to reduce overhead costs.
With renters in mind, investing in the right area and type of property to meet your rental expectations is crucial.
Existing or new areas undergoing development are prime pockets for investment consideration.
In particular, existing areas being gentrified will typically result in lower prices to attract buyers to what may have previously been a less desirable neighborhood. This enables investors to get into an up-and-coming pocket for a lower price, maximizing the potential for profit as development unfolds and area value increases.
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When it comes to investment property, long-term (equity) gains are what it’s all about.
The ideal strategy when investing in a rental property is not only to obtain consistent, long-term renters, but ideally, to be able to hold onto this property long-term. This allows for its value to grow over time, as you continue to pull in the rental income, which can be put toward your mortgage in the interim and ultimately increasing the value of your investment exponentially by the time you flip it and move on to your next property.
Of the many types of rental properties to consider, one of the most popular options is investing in a multi-residential property.
For obvious reasons, the option of a multi-residential investment property is best explored by experienced landlords. These properties typically include 3 or more units, and will initially require a higher cost from investors, but will also result in higher returns down the road.
Operating as a landlord is a huge responsibility that should not be considered lightly, with the role including many risky variables such as tenant-related issues, unexpected financial costs and burdens, not to mention the spectrum of legal liabilities you become vulnerable to. However, with the proper consideration and planning, the benefits of rental properties will outweigh the potential risks. Benefits such as tax-deductible costs, income stream and the potential for value appreciation over time.
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