Every since I started to invest for myself, my goals were to diversify my investments and to increase my income streams. One of the ways to increase my income streams is to buy rental properties. So I’ll walk you through the whole process from wanting to buy a property to owning the property.
1) How much do I have to invest?
The first question that comes to my mind is, “How much money do I have to invest in an investment property?” This is one of the most important an obvious requirements that will determine the rest of the process. Whatever the number is, it’ll be at most 25% of the purchase price of your property. For example, if you have $100,000 to invest, then you should only buy a property that is $400,000 or less.
2) How much do I need to close my property?
To start, you’ll need to put a 20% down payment if your property is an investment property. You’ll need to have $$$ left over to cover land transfer tax, lawyer fee, insurance, three months of mortgage payments and renovation cost. So 5% to 10% of total value of the property is not outrageous. When I bought one of my rental properties in Toronto, I had to pay both the Toronto and Ontario land transfer taxes and took two months to complete major renovations to upgrade the property. The total cost of these two items amounts to about 10% (3% land transfer tax and 7% for renovation and two months of mortgage payment and bills) of the property’s value. For newer properties, you can get away with just doing minor touch-ups to rent your property out. Hence, that’s why I mentioned the 25% as the minimum requirement in point #1.
3) High-rise Or Low-rise?
There are benefits and drawbacks with owning both types of properties. For low-rise, you’ll have more work to do in terms of maintenance, since the owner of the house is responsible for shoveling the snow, mowing the lawn and take care of the building structure. However, the cost is totally within the owner’s control. For high-rise, outside maintenance activities are not required by the owner as the condo corporation will do all of that. The downside is, the condo owner needs to pay a monthly maintenance fee and has very little control of rising fees. So the choice depends on how comfortable you at managing the maintenance of the property. Do less maintenance = high-rise, do more maintenance (and save money) = low-rise
4) Location, Location, Location
We all like to own good properties forever, but we need to manage the liquidation risk. Sometimes we’d like to cash out and make the profit. Other times, we run into financial issues due to unforeseen reasons and need to sell to unlock our capital. Whatever the reason, having your property at a great location will ensure a few advantageous factors. First, a good location will allow you to rent out the property faster, which will limit your vacancy risk. Second, a good location will preserve the market value better and will have more potential for future capital gain. Third, good locations are in high demand, so when you need to sell fast, you’ll have a better chance of doing that and will lower your liquidation and financial loss risk.
5) Form your buying team
The main professional on your buying team will be a Realtor. However, it’s best that you contact other professionals such as a real estate lawyer, mortgage broker, contractor, insurance specialist, home inspector etc. to have every angle of the buying process covered. That way, you will be able to review contracts, get financing, renovation estimate, insurance cost and inspect the property in a timely manner. Having to form your team before hand will give you an advantage when you get into a bidding war (I don’t normally recommend getting in a bidding war, but it doesn’t hurt to be prepared.)
6) Shop around
Since it’s an investment property, you have to be confident that you can rent it out easily so that you’ll lower your vacancy risk. If you are not confident about the potential of the property, then move on. My view is that it’s better to lose an opportunity than to lose your own investment capital.
7) Maintenance proof your property
When you purchase the property, you should have had a home inspection done. Make sure that you (or the seller, which I preferred) fix all the major issues and take preventative measures to prevent future issues from occurring. If you do that, you’ll get a lot fewer service calls from your tenants in the future.
8) Make your property energy efficient
If you are paying partial or all the utilities, it’s best to make sure that your property is energy efficient. I upgraded all the light bulbs the energy efficient LED light bulbs in my rental property so that I save money on the utility bills and rarely have to change it as they last for about 10 years. Lower cost means high profit.
9) Know the Residential Tenancy Act
When you are the landlord, you must have knowledge of the important rules in this act. Rules such as rent increases, termination notices, tenant screening etc are vital to your rental business. By knowing this, you’ll mitigate your risk of major financial loss and sometimes, criminal prosecution.
10) Beware of the professional tenants
These are the leeches of our society. They don’t want to pay you rent and live for free in your house and you want to avoid these tenants. Just read this Toronto Star article and you’ll know why I dread them so much as a landlord
11) Set up your process
If you set up a process to advertise your property (I only use kijiji and it’s sufficient for me), screen your tenant, manage your leases, rental payments and bills, you’ll spend less time to run your business. After year two, it’s just wash and rinse (take my word on that).
12) Enjoy the reward
When you work hard to build an income generating property, reward yourself at least once a year. There is nothing wrong with a little celebration. This will motivate you to find more opportunities to make extra money.
If you find it useful (or ineffective), let me know by providing your comments below.