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monopolyAn article spanning every type of investment property could go on for dozens and dozens of pages. For that reason, this article will focus on residential “single family home” investment properties that are used as rentals in the Peel or Halton regions. With interest rates as low as they are and the rental market being strong, we have been working with many investors trying to find the right second, third or fourth property to add to their portfolio.

Being a landlord

The first thing you need to determine is whether or not you’re cut out to be a landlord. It isn’t as easy as collecting a cheque at the end of every month. Sometimes things go awry and you have to be both resourceful and prepared.

Sometimes the property is vacant and new tenants need to be found. Sometimes the current tenants are undesirable or don’t pay and need to be evicted. Are you up to the task? Here’s a list of current landlord/tenant rules and regulations for Ontario. Some items may surprise you: http://www.cmhc.ca/en/co/reho/yogureho/fash/fash_009.cfm

Financing

Once you’ve decided you’d like to take on the responsibility of being a landlord, you need to determine what you can afford. For a “non-owner occupied” property, the minimum down-payment required is 20%. For an owner occupied (duplex or single family home with basement apartment are examples) a minimum of 5% down is required. It is best to consult your mortgage professional for details on your down-payment and rate/term options. When discussing income properties, it is usually best to stick to the minimum down-payment (with current interest rates) so as to better leverage your capital.

Types of properties

The next step in the process is deciding what type or property you’d like to invest in. There are tons of options available and we will discuss them.

Condo Apartment: Extremely easy to maintain, minimal headaches for the landlord and tenants. A negative is that rental norms dictate that the condo fee (which can be in the $300-600+) is to be included in the rent price. The monthly rental rate of a $300,000 condo is similar to that of $320-330k freehold townhome. Condo apartments also don’t seem to appreciate at the same rate as freehold properties as their condo fee typically rises over time.

Condo Townhomes: Similar to condo apartments, but with a lower monthly fee ($150-350) and slightly more concerns/maintenance for the landlord and tenant.

Freehold townhomes: Relatively low maintenance (especially on 3 storey homes with small properties) and no monthly fees make these a very attractive option for potential landlords and tenants. Often offering the highest rates of return, they are a strong option to consider.

Semi-Detached: Higher initial price than the freehold townhomes, they usually bring in more attractive tenants. While the rate of return isn’t quite as high, they are still a viable option.

Detached homes: Very limited rental market, low rate of return for your investment (in terms of rental income) and significant maintenance. Benefits are that you should get high quality tenants and that in the event housing market rises, you should see the highest increases. Also to note, higher property taxes will take up a larger portion of the rent as well. A $500k detached home will typically rent out in the $1750-1900/mo range and a 325k townhome will be in the $1500-1550/mo range. The townhome’s property taxes will also be roughly $100 less per month.

Figuring out your Return

Rent collected – mortgage – taxes = Net income. In a perfect world with no vacancy, delinquent tenants or repairs needing to be made, this would be a simple equation. In reality it isn’t so cut and dry. Finding a tenant to occupy your property as soon as the previous tenant (or you obtain vacant possession) isn’t always possible. There may be weeks or even month-long stretches where your property is vacant, and you need to be prepared for such an occurrence. Roofs, furnaces, air conditioners and appliances all have to be replaced eventually as well. Plumbing and electrical problems can happen any time as well. This will all depend on the age and condition of the home and its fixtures/chattels. Remember that your time (or a property manager’s time) should also be factored into the equation at about 5-7%.

When renting your property out, there may also be some fees incurred. These days it isn’t overly difficult to put up a posting on craiglist or kijiji and get a renter into your property. You may also want to consider hiring a Realtor to take photos, market your rental on the MLS service and deal with the paperwork. The cost of this service is typically 1 month’s rent (half a month to the listing agent, half to the buying agent).

It’s important to note that any net income produced by the property is taxable income. There are many deductions possible and tax benefits as well, but for more information on that it is best to contact your accountant or a professional in that field.

Here is a table with typical current monthly rents and housing costs in Milton.

Property Type Purchase Price Range Expected Monthly Rent  Monthly Property Taxes
Condo Apartment/Town $220-360K $1300-1700 $120-190
Freehold Town $310-425K $1400-1750 $165-240
Semi-Detached $350-450K $1500-1850 $175-255
Detached $425-650K $1700-2000 $200-350

 

Owning an income property is not easy, nor is it for anyone. While it is not the road to easy riches, it is certainly a welcome part in a healthy, diversified investment portfolio. If you have any questions regarding purchasing a residential income property or about your specific situation, give us a call or send us an email and we’d be glad to sit down with you and discuss your options.