Buying income property
With low interest rates and spiking real estate prices, rental-property
owners have done exceedingly well during the past five years. And
many potential buyers are hoping to get on the gravy train
Although results vary, rental-property prices are at historic highs
in many major Canadian markets. For example, "plex" buildings
(those with between two and five rental units) in Montreal increased
an average of 68.1 percent in the past five years according to the
Greater Montreal Real Estate Board.
But despite the allure of quick money, experts caution that there
is a big difference between buying a house or condo for yourself
and buying property as an investment.
"When you buy rental property, you are getting
into business for yourself. It's not like buying residential real
estate," says Vince Brescia, president of the Ontario Federation
of Rental Housing Providers. "Your decisions should be made
on a cold dollars-and-cents basis."
To help, we've compiled a list of things to do for those who are
thinking about becoming landlords:
Learn the business
One ironclad rule for potential buyers is that you should work in
the industry for at least two years first. There are more potential
pitfalls in the rental-property business than you can learn about
by simply reading.
Working part-time for a friend or relative who owns a building
before investing in your own will dramatically increase your chance
of succeeding. If that isn't an option, talking to other building
owners in the neighbourhood where you are thinking of buying would
be a good start.
Don't put all your eggs in one basket. Start by buying a one- or
two-unit property, so you can make your mistakes when there isn't
too much at stake. There's a lot to learn about negotiating with
tenants and contractors, doing minor repairs and handling the tax
and regulatory paperwork.
Check the valuation metrics used in different markets
Buying rental property is similar to buying residential property
in many ways, except the stakes can be much higher. For smaller
units, particularly in the plex market, the asking price tends to
be arrived at by comparing the unit to be sold with the selling
price of similar units in the area that have changed hands recently.
Larger properties, on the other hand, tend to be priced according
to gross rental revenues.
Don't pay too much
A big part of making money in real estate lies in getting in at
the right price. So make sure that you don't pay too much. The trick,
of course, is knowing what "too much" is. But shopping
around and avoiding areas that have seen big run-ups in recent years
are good ideas.
It's also best to talk to several real estate agents that specialize
in the market you want to invest in to make sure the property that
you want to buy has been correctly priced. And don't forget to get
your property inspected.
Get a good lawyer and accountant
The rental industry is highly regulated. The paperwork aspects of
being a property owner are just as important as the business aspects.
A good lawyer and accountant may be pricey, but they are usually
worth it. Ask other property owners to recommend professionals who
have real estate experience.
Contact a property owners' association
Most Canadian provinces and territories have an association geared
to lobbying for and providing support to rental-property owners.
Rental laws differ from region to region across the country, especially
in the area of rent control. Quebec's rental laws, for example,
are based on civil law as opposed to common law, as in the rest
These associations, such as the Ontario Federation
of Rental Housing Providers, often have good information on their
Web sites that will give potential buyers a good idea of some of
the challenges they will face and how to deal with them.
Familiarize yourself with the tax implications
If you buy a rental property, you'll have to produce a set of financial
statements for tax purposes outlining your revenues and expenses.
It pays to do some research beforehand, so be sure to read Bankrate
Canada's story, The
tax implications of owning property.
Arrange financing first
According to Danielle Turbide, a mortgage broker with Multi-Prêts
Hypothèques, the Canadian banking industry regards buildings
with between one and six rental units as residential real estate.
They are thus eligible to be financed at the promotional posted
Buildings with more than seven rental units are considered to be
commercial properties and are evaluated using much tougher criteria.
Interest is charged based on the bank's assessment of the risk that
is inherent in the deal.
Check out the tenants
For most small-rental-property owners, choosing tenants will be
the most important decision that they make. Industry professionals
say that rental laws are stacked in favour of tenants, and it can
be hard -- and sometimes impossible -- to expel bad ones.
According to Brescia, it is far better to take a good
tenant who pays you a little less in rent than take your chances
with a suspect tenant, just because he is a little looser with his
Get your hands dirty
Landlords who have a bit of the handyman in them, or who like to
do minor renovations and repairs themselves, will have a big leg
up in the rental-property business. Building owners often say that
the work they put into the property is the difference between making
a profit or loss.
Diekmeyer is the Montreal Gazette's management columnist.