The key to finding an investment property that can earn income and make a profit is buying smart. You can accomplish this by:

  • Setting clear investment goals
  • Thoroughly researching available properties, locations and the local rental market
  • Being prepared for any up-front costs, including a minimum down payment of 20%, closing costs, etc.
  • Calculating your estimated monthly cash flow (rental income less property expenses)
  • Having a long-term investment horizon
  • Being prepared to withstand any unforeseen downturns in the housing market
  • Hiring qualified real estate and mortgage specialists for any expert advice you may want during the property-buying process

Is the property a good investment?

As you look at potential real estate to purchase, ask yourself the following questions:

  • Does it meet your price and location criteria?
  • Can it generate sufficient rental income?
  • Does it have potential to appreciate in value over the long term?

If you can answer yes to all three questions, the property is definitely worth a second look.

Common rental property costs

After you make a purchase and become a property owner, you will need to juggle rental income with a number of one-time or recurring expenses. These costs will likely include:

Down payment

Federal legislation requires a 20% down payment for non-owner occupied properties.

Homeowners insurance

Insurance for rental properties can vary significantly depending on where you live, especially if the property is located in a region prone to flooding, fires or other natural disasters.

Legal fees and administrative costs

Budget for a lawyer to assist with a range of legal and administrative needs, including drafting rental agreements and running credit histories on potential tenants. As a landlord, you will also be responsible for paying various registrations, inspection and other fees.

Taxes and tax deductions

Property taxes vary by property type, eg: residential, multi-unit residential, commercial etc As a landlord, you can also claim tax deductions for expenses related to your rental property. Expenses include mortgage interest, advertising, maintenance, repairs etc. You may want to hire an accountant or tax professional to make sure you accurately identify all the rental property deductions you can take at tax time. Visit http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/bt/rprt/xpns/menu-eng.html for complete details on deducting rental expenses.

Repairs / Maintenance

Consider putting money into a reserve account for any repairs or major expenses that you might incur. In general, for a single family house, allocate 5-15%, along with savings or access to credit for approximately 10% of the property value for major expenses.

Tenant risk

The value and potential savings to you from renting to good tenants who are likely to stay longer cannot be overstated. A good tenant will tend to need fewer repairs and leave the property in good condition when they move out. Consider hiring a property manager to handle your tenant searches, interviews, background checks, etc.

Utilities

Utilities, like gas and electric, are typically the tenant’s responsibility, while water and sewer is often included in the rent. If you plan to include utilities in your rental price, get an estimate of average monthly usage from the utility company.

Vacancy allowance

There’s a chance your property will sit vacant for periods of time when a tenant moves out. The exact length of time will depend on local demand and how good you are at filling any vacancies. If possible, you may want to plan for two months of vacancy per year when setting your rents. Ask your real estate agent for information on local vacancy rates and the average length of time that properties in the area remain vacant.

Once you find the property you want, an investor mortgage specialist can review your financing options with you.