Are you investing?

YES! I recommend setting up a team of like-minded professionals who really have an understanding of real estate investing. Your contacts should include: an excellent real estate lawyer, an accountant, Mortgage Broker, property manager and contractor or handyman.

A property manager is optional, but if you have a property that is in a different location to yourself as the owner, a property manager can take away a lot of stress and time. Most management companies charge a fee between 8% and 15%. Often times the more rental properties you own; the lack of property manager will cost you in the long run. The property manager is generally in charge of advertising your property, completing the showing requests, finding tenants and completing the applications and lease agreements. If there are ever issues with rent collection during the lease or if an addition is required for any reason, the property manager typically handles this on your behalf. They usually act as the middleman between the tenant and the landlord and really become a timesaver for the homeowner. As the owner, we always recommend factoring in a property management allowance into your monthly overhead.

There is a difference between short-term rentals and long-term rentals. A short-term rental, often referred to as a STR will usually be a rental that is advertised on a site such as Airbnb or VRBO and true to its name, these are rentals that are in fact only short term stays such as few nights but could be extended for months. There is no physical lease agreement in place for these properties and often times can yield a higher return or surplus of income on a monthly or annual basis depending on the property type. However, there is more management involved and additional set up costs to furnish and stage the home. Depending on the location of the property or if it’s more of a seasonal hotspot, you could see levels of volatility or inconsistent rent during slower seasons. A property manager for a STR, does not have the same licensing requirements and often charge a higher management fee, closer to 25% as they have more involvement with the guest experience, cleaning, check-in/checkout, and any software and advertising cost. There are many helpful apps involved to assist you with short term rentals (see examples included at the end of this page). A long-term rental includes a physical lease agreement with tenants, a security deposit is involved and there is more consistency with month-to-month rent.

If you’re a new investor looking to purchase a rental property, it is important to ensure that you factor in all of your costs and overhead of your investment. The main items to include will be the monthly mortgage payment, property taxes, property management costs (unless self-managed), rental/homeowner’s insurance, and any condo or strata fees if applicable. Utilities are generally at the cost of the tenant on a long-term rental but at the expense of the landlord for a short-term rental.

Adding a contingency is also recommended for any unforeseen expenses that come up with the property during the tenancy. If the homeowner also has a variable/adjustable rate mortgage, you have to allow for a potential fluctuation in mortgage payments. The same goes for a property that has condo fees; the Condo Board could decide to increase condo fees or call for a special assessment at any time.

Taxes are always applicable when you earn income. You may be charged differently if the property is a STR or a long-term rental and you may require a GST number if you’re in the STR business.

Capital gains are also due when selling a rental property. Sometimes homeowners will become accidental tenants. In an unpredictable or low market where house prices are down and inventory is high some homeowners may decide to rent their owner-occupied home for a short time instead of selling. Their hopes would be to wait out the lull in the market and sell when prices are higher; maybe at an increase of 10-20%. You may want to crunch the numbers as the taxable capital gains, could eat up any additional profits or upside on the home sale.

To get a real understanding of what the taxes could cost you, we recommend speaking with your Accountant in addition to your real estate agent before selling.

Either option is great provided you do your homework first. You will need to weigh the pros and cons of the area, location and rental income probability. For a new home, the builder usually provides structural warranty and with the home being ‘new’ there could be less maintenance or service work for you as the homeowner to do after the purchase. This means less money spent out of your pocket for upfront work on the home. However, you need to consider that a brand-new home usually has yard work, landscaping, deck and fence that needs to be completed/built and there are costs for this.

Location, location, location!! Well, and dually suited!! Anytime you can purchase a property where there are two or more suites this increases your rental income; it is generally more profitable and it reduces your monthly risk. If you have a vacancy in one unit, you aren’t left holding the costs of the entire property if the other unit is rented.

Another popular type of rental purchase is a builder buyback property where rent is guaranteed for a certain numbers of years from the seller. These are very popular in new development condo projects and showhomes in new communities. The rents can be quite high, and you are guaranteed this amount with a stable tenant (usually the builder) for a good period of time.

Properties with Condo boards and bylaws can be tricky. The condo board could decide to eliminate or restrict long-term or short-term rentals which can change your business plan. Condo bylaws can even outweigh zoning. There can also be inconsistent condo fees or special assessments that come down the pipe and this can wreak havoc with your profitability and returns.

A quick Google search can quickly find you spreadsheets, worksheets or a Proforma example that can help with your month-to-month tracking or accounting needs. This is imperative to ensure that your property is profitable and meets your financial goals. You need to be sure to include hard costs and soft costs which would include any contingencies or rental vacancies.

When mortgaging a rental property, there are different types of financing that you can request. Our favourite would be the re-advanceable mortgage. It is a great tool for the investor. As you pay your principal balance down month over month or year over year, there is a HELOC (home equity line of credit) tied to your overall financing which is growing in available capital which could be used as a borrowing line or available capital for future purchases or for accessibility for future repairs or improvements on the property. For example, if you had a mortgage of $300,000, and paid down $100,000 in principle over five years, you would then have $200,000 owing on the mortgage and an available HELOC for $100,000. There would be no balance owing on this but it could be available for future use. Not all lenders offer this mortgage product and the example shown above can vary from lender to lender.

Manulife also has a unique and similar product called an All-in-one product. Click here to get more information about Manulife product offerings.

There are many different mortgage products available for someone who is wanting to flip a property or purchase a long-term rental. Whatever your real estate goals are, we would be happy to discuss a plan.

This is a term generally used in multi-family properties, buildings or commercial purchases. To determine a cap rate, you would divide your monthly expenses with the property value. The expenses do not include a mortgage payment. Depending on what province or area you are in, a good cap rate is generally around 5% or more. We wouldn’t recommend getting hung up on cap rates for residential rental properties. For a basic definition, a Cap Rate determines if a rental project is profitable. However, keep in mind that these numbers can be skewed if a mortgage payment is prevalent.

You need 20% down payment when buying any type of property that has an income earning potential. You will want to chat with your broker to determine the best type of mortgage available. If you’re looking for payment protection with consistent payments throughout the entire term, then a fixed rate or a true variable mortgage where your payments do not shift would be advisable. This gives you the ability to better gauge your revenues each month.

You also have to determine what your goal is with the rental property. Some buyers purchase an investment property for monthly cash flow while others purchase the property for future retirement. With the latter, your goal might be to breakeven every month on your investment while aggressively paying down the principal so that when retirement comes along, the majority of your monthly rental revenues is all income.

If your mediate goal is monthly cash flow, then you would want to consider reducing your mortgage payments as much as possible which could mean obtaining a 30 year amortized mortgage instead of the standard 25 year mortgage when your payments would be higher.

When purchasing a rental property, the banks will allow us to use a percentage (usually not 100%) of the rental income to help with qualifying. We can use a lease agreement, or we can order something called a market rents report which is created by an appraiser and advises us what the going rental income could be for your specific property type in that community.