NEED TO KNOW BASICS BEFORE BUYING A RENTAL PROPERTY
So you’re ready to buy your first rental property. Maybe you’ve heard about all the money you can make just by buying a property, finding a tenant, and letting the cash roll in.
Perhaps your parents had rental property and you know the money that can be made. Or maybe you’d like to buy a house with a basement suite and have someone help pay your mortgage. All these are great reasons to consider owning rental property.
Where to Start? Evaluate Your Current Living Situation
Where are you living right now? Are you happy where you’re currently living? Do you want to live in the same building as your tenant by having a basement suite or one side of a duplex to rent out or would you prefer to live in a dwelling away from your tenants? Do you own your home or are you renting?
Are you living in a house or an apartment condo? If you live in a house, what do you like about living in a house? If you’re living in an apartment condo, what is it about condo living that really appeals to you?
These questions are important for two reasons. First of all, if you’re not happy with your current living arrangement, you need to ask yourself why. What don’t you like about where you’re currently living and what would you prefer instead?
If you’re a homeowner, it could mean selling your current home and buying another home with a rental suite or renovating your existing home to include a rental unit so you can test the rental waters.
Secondly, if you’re currently living in a house and you’re happy there, you likely understand why a tenant would want to live in a house and what would make a house appealing to renters.
Things like having a yard for the kids or your dog to play in, a place to set up a BBQ and grill some steaks, and more room to park your vehicles and the vehicles of your friends when they come to visit. Maybe even a place to grow a garden and some flowers.
Knowing these things will help you identify who your ideal tenant would be and how you should advertise your rental property to attract these renters.
Your answers to these 3 questions will tell you;
- If you should consider buying a rental property that you’ll live in and share with your tenant
- If that rental property should be a house or a condo
- Who your ideal tenants are.
Responsibilities and Costs of Owning a House
If you’re currently renting a house, then lucky you! You’re probably experiencing many of the benefits of living in a house without a lot of the worries and responsibilities of maintenance for its upkeep.
If you own the house that you’re living in, then you know how much work it is to maintain a house and the added expenses that go with it. Maintenance expenses are in addition to housing expenses like property taxes and utility bills such as heating, water, electrical, telephone, and cable.
Houses have furnaces, hot water heaters, roofs, yards, eaves troughs to clean and sidewalks to shovel in winter. If you can’t do this maintenance work yourself, you’ll have to hire it out and pay for the labor and materials to do this work.
On top of this, houses also have foundations. This can sometimes mean repairs to the foundation, interior walls, and flooring after mold or water is found in the basement. In addition, it can also often mean having to change the grade (i.e. slope of the ground) around the house to prevent future water drainage towards the house and foundation.
Keep in mind that when this happens, you’re also losing rental money because the unit can’t be rented out while repairs are being completed inside the suite. I had to deal with both of these issues and expenses with my first rental property a few months after I bought it with my friend and it was scary but we made it through. We had so much flooding in our rental property that people were canoeing down the street out front! Now that’s water damage!
Benefits of Renting Out a Portion of the House You Live In
Besides the benefits of living in a house already mentioned above, another upside is the potential to have a suite or separate unit as part of the house which you can rent out.
By living in part of the house, you’re there to watch over your house and make sure that the tenants are taking reasonably good care of it. On the flip-side, if the suite is a basement suite, you might find that you need the extra room downstairs or might not like having somebody live below your living space.
The other benefit to buying a house and renting out part of it is that the house will be considered your principal residence because you’ll be living there, and because of that, it’ll be relatively easy for you to get a mortgage from the bank to buy the house (assuming your credit checks out OK and you have enough money for the down payment).
You’ll also be able to claim a tax deduction come tax time for a portion of the interest you pay on your mortgage. This is done by estimating what percentage of your house is occupied by the rental suite & isn’t available for you to use. Finally, you can also get some help paying your utility bills each month by having the tenant pay a portion of the heat, water, and electricity bills.
If you won’t be living in the house or condo that you want to purchase to rent out, it won’t be considered your principal residence and because of this, you won’t qualify for a traditional CMHC mortgage.
To buy a property in this situation, you’ll need to have other financing in place such as a home equity line of credit, an unsecured line of credit, a loan from a family member or friend, or access to cash so you can buy it outright.
More Rental Property Considerations
Houses often cost more than condos to buy, however, houses usually appreciate in value faster than condos. It’s also usually easier to sell a house than a condo (all other things being considered equal) because there are usually fewer houses on the market in a given price point and neighborhood than condos.
There is also usually greater buyer demand for houses vs. condos, particularly in most Canadian cities today where there is a glut of condos on the market for sale as compared to houses.
Another thing to consider is that because houses are usually larger than condos, it’s possible to buy a house with multiple units to rent out such as a duplex, triplex, or fourplex.
One landlord I know use to rent out bedrooms in a larger house because he collected more rent this way. Renting bedrooms does have its downside though such as higher renter turnover, roommate conflicts, more wear and tear on the house (due to frequent moves), parking issues, and difficulty preparing a bedroom for another tenant when one moves out and the other tenants remain. Because of these drawbacks, he quickly decided to rent the house out to families or one renter even though he made less rent.
What About Renting out a Condo?
I’m glad you asked! I’ve done this as well with my husband and found some great benefits to renting out a condo versus a house. First of all, a condo is usually easier to maintain. There are no sidewalks to shovel, no lawns to mow, weeds to control or gutters to clean. Condo buildings are usually well lit and locked so people living alone often feel more secure living in a condo than a house.
Other pluses? You don’t have to worry about the furnace conking out on you on a cold winter night because the heating in a condo building is usually done by large boiler units which you’re not personally responsible for. If you want to go somewhere, you simply lock up your unit and leave.
There are some drawbacks to condo living though. It’s hard to entertain more than a couple guests in a condo at a time due to space restrictions and you need to ensure that you’re not too noisy and disrupting the neighbors. Some condos are noisier than others, depending on what materials are used for their construction.
Food odors wafting from other units can also be an annoyance for some people. Certain pets may or may not be allowed, depending on the policy set by the condo board. Parking is often very limited (we had just one parking stall with our unit).
Storage is usually extremely limited and storage of bicycles on patios may not be allowed. Laundry facilities may be shared on each floor or by the entire building and may be coin-operated. Ideally, it’s great to have in-suite laundry as this is something tenants look for.
But I Hate the Idea of Paying Condo Fees!
Condo fees can be a two-edged sword. On one hand, condo fees are great because they pool funds from all the owners to pay for maintenance that can be expensive such as roof repairs, boiler repairs, maintenance of the common areas & grounds, community pool, etc.
This means that as a property owner, you don’t have to have a large emergency fund to repair a leaky roof or replace your furnace if it dies. It also means you don’t have to buy things such as lawnmowers, shovels and snow blowers or do any mowing or shoveling yourself.
Monthly condo fees often cover heat, water, and sometimes cable expenses as well so the condo owner only has to pay a small electrical bill each month in addition to their phone.
On the other hand, condo fees can be troublesome if owners feel they don’t have control over condo fee increases or if their condo reserve fund is not adequate to cover major expenses. Beware of buying a condo that has unusually low condo fees!
This can be more common with new condos where the builder tries to keep the condo fees low in order to entice new buyers. The downside is that a large condo reserve fund is never built up for the new buyers which puts each owner at risk for very costly repairs if (or I should say when!) they do occur.
My husband bought a condo that he lived in years ago and he was happy to find out the condo fees were quite low, however, when he got on the condo board, he found out that the condo reserve fund was very low and not adequate to cover any major expenses.
If a major expense would have occurred at the time, each of the individual condo owners would have been required to pay thousands of dollars out-of-pocket to have the necessary repairs made. Needless to say, very few of the owners had this kind of money to pay for such repairs at the time.
Better Prepared to Make a Decision
Deciding to buy a house or condo for your first rental property depends on things such as your personal preferences of wanting to own and maintain a house versus condo for rental purposes. You also need to decide if you want to live in part of the dwelling you’re purchasing while renting out the remaining portion or if you prefer to have your rental property separate from where you live.
By looking at the pros and cons of purchasing a house versus a condo for your first rental property, you’ll be more be more confident and informed as you make this life-changing investment.
Thanks to Leona my long-time online finance friend for sharing her expertise as a rental property landlord today in her blog post. I’ve always considered becoming a rental property owner so it’s nice to hear about experiences from others.
Contribution By: Leona Werezak is a freelance writer and nurse educator whose interests include real estate, personal finance, and nutritional health.
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