Investing in cash flow positive residential rental units
or
Becoming a Landlord
Part 2
Welcome Back!
Once you have a plan, it is time to start looking at properties, and this is where the 2nd set of challenges comes in, figuring out what to pay for an income property. Unlike when purchasing your home, there are different things to look at when purchasing an income property, and one of the biggest things to watch out for is making sure you don’t pay too much. This seems straight forward, however many to be landlords have begun there venture poorly by simply overpaying for the rental property. You will need to begin by removing all feelings from the equation when you make this purchase. Remembering the following will go a long way in protecting you for paying too much:
1) This is not your home, it is an investment, don’t fall in love with the place because it looks or feels great. It should be in solid shape mechanically, be clean and livable, and easy to maintain. If you are looking at a place that has manicured gardens and a hot tub, move on. Maintenance and up keep costs will drain all your revenue.
2) Do not purchase the first place you see. Again this is a different kind of purchase than a home. It is meant as an investment. “You don’t have to buy!” I have seen and heard many stories of people getting into bidding wars over homes, and if you want a home this is fine if you really want the place. There has never been an investment property I have ever heard of that is worth a bidding war over, every extra dollar you spend is less money that will come back to you. There are always new places hitting the market, if you wait and are willing to walk away when the numbers just don’t look right, you will not overpay.
3) Numbers looking right leads into the third thing you should remember. The numbers. Mortgaging a rental unit is common; just remember that the ins and outs don’t include only the mortgage payment. You will have property taxes, insurance, utilities (even if the rent is plus plus we always suggest paying the water bill yourself. In many municipalities the water bill stays with the home, not the person living in it. So a bad tenant can cost you thousands unexpectedly if they leave and never pay the water bill. The township won’t go after you tenant, they will just add the amount owing to your property taxes.), maintenance and upkeep, property management fees (if you use a property management company). All these can add up and suddenly the $1200.00 a month you are getting in rent won’t look so good. Before you purchase a rental property make sure to get as many of these numbers as possible, you can estimate but it is always better to see concrete proof of that the operating costs of a building are from the current owner. Also remember that if you plan on including utilities in the rent then bump your utilities costs by around 10%. People tend to leave the lights on and keep the furnace on longer when they are not directly paying these costs.
4) Make sure you are charging sufficient rent. We often come across landlords who feel that they are charging enough rent when in actuality they are well below market rate. If you are not using a property manager or real estate agent to rent out your properties then do some research before you set your rental rate. You will probably be surprised by what the going rate for rent is in your area. Better yet figure out how much you need to charge to cover the mortgage and operating cost of the rental property, then add what you want to “make as profit” then compare to the going rate in your area. If what you need to make is less than the going rate, then simply charge what the market will bear and be happy with a larger income stream than you were expecting. If the market rate is lower, then rethink purchasing the property, or lower your expectations of how much revenue you can generate for yourself.
5) Maintain, Maintain, Maintain. An ounce of prevention is worth a pound of cure is not only good advice for staying healthy. It is also good advice for keeping your cash flow healthy. If the fridge is old purchase a new one, you will save money in the long term in the reduced electricity bills alone. Same goes for all your appliances, furnace, any heating or cooling units. Making sure the mechanical systems are well maintained will save you from a hefty surprise bill later than can ruin you profits. A $250.00 bill that you know about and can control is better than a $1500.00 bill you were not expecting.
6) Do everything properly. Being a good landlord does not mean letting your self be walked all over. The tenancy agreement is a contract and both parties have obligations towards one another. Yes it is your responsibility to deal with maintenance issues in a timely fashion bedbug infestation, landlord must take care of it. However if the tenant does not pay in time, then an N4 form should always be filled out and delivered. You are attempting to protect your investment; however the tenant has rented all the space inside, and has the right to quiet enjoyment. We always suggest both landlords and tenant become very familiar with the landlord tenant act. Knowing your rights and obligations, and making sure your tenant is also knowledgeable will go a long way to preventing any problems.
There are many challenges to face as a landlord, however if you do your homework, treat the investment as a business, and take good care, then a rental unit can provide a very stable long term source of revenue that you can count on.
Of course if this is overwhelming, but you still want to stay in the game, give Harbourview Property Management a call and we can take care of it. You’re Busy, Let us do the work!
Cheers, and happy landlording!