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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."

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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.

Start small
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 of Canada.

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 mortgage rates.

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 cash.

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.

Peter Diekmeyer is the Montreal Gazette's management columnist.

-- Posted: Aug. 25, 2004
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