Are you dreaming about owning a rental property and making some extra income each month? Before diving into becoming a landlord, there are some things you should know from the advantages and disadvantages to some tips when it comes to buying a rental property.
Advantages of Owning a Rental Property
If you’re looking to purchase a property for rental and become a landlord, you are likely already aware of some of these advantages, but just in case, some benefits to this include:
- Earning additional regularly monthly income
- Allows you to continue to build home equity in the property(s) that you rent
- Ability to deduct certain items from your gross rental income such as mortgage interest, property taxes, insurance, maintenance costs, property management fees and utilities.
Disadvantages of Owning a Rental Property
As with any investment, there are also some disadvantages to owning a rental property, which are important to consider before you make the leap. These can include:
- Responsibility of maintaining the rental property and managing your tenant(s)
- Rental income is taxable and must be included on your income tax. Depending on the value of the extra income, it may push you into a higher tax bracket.
- Unexpected expenses and issues may crop up over time. It is ideal to budget 2% of the purchase price of your property for potential repairs. You’ll also want to keep some money aside should your tenant leave and you need to cover a few months to find a new tenant.
- If you choose to sell the rental property in the future, it will be subject to capital gains tax.
What to Know BEFORE You Buy
Before getting started, it is important to calculate the cost of your investment (purchase price and closing costs), as well as consider maintenance amounts (approximately 1% of the property value for the year) and compare to current rental prices to be sure it is a profitable investment before purchasing. In addition, note the following:
- The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else. Another option is to utilize existing equity in your primary residence and refinance for the cash to purchase your rental or investment property. Be sure to factor in funds for closing costs, potential repairs and maintenance in your amount.
- Only a portion of the rental income can be used to qualify and determine how much you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income and subtract your expenses.
- Interest rates usually have a premium when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
Final Tips on Becoming a Landlord
If you’ve decided to move forward with getting a rental property and becoming a landlord, here are some tips to consider:
- Don’t forget about insurance! Ensure you have proper coverage for a rental situation and to cover any unforeseen events.
- Educate yourself on what it means to be a landlord in your province from tenant laws to rental responsibilities.
- Do your research on rental rates and locations before you choose to buy so that you are aware of where the market is at when it comes to potential earning power.
- Choose the right mortgage for your rental property. Your mortgage broker can help you with this!
- If you’re looking to run multiple rental properties, consider hiring a property manager who can be a go-between with you and the tenants.
With the right purchase price and rental costs per month, a rental property can be a great way to supplement income. If you’re looking to purchase an investment property, be sure to reach out to a Dominion Lending Centres mortgage expert to discuss your options and understand what is required.