Becoming a landlord is an increasingly popular choice for many Ontarians. Some choose to rent out a basement apartment to supplement their income and help pay the mortgage, others might be looking to earn income from a second home, and there are plenty of people looking to build up a rental portfolio.
Whichever path you are taking there are certain things that you need to know before you start leasing your property. We’re here to help with our list of things you need to know before becoming a landlord.
It’s not easy
Let’s get this out of the way right from the start: there’s plenty of work involved in being a landlord and that can greatly impact either the amount of time you spend or your income. As a landlord, you have to promote your property, assess potential renters, ensure you collect payments and chase them up if they don’t arrive, take responsibility for fixes to the property, and sometimes negotiate with the neighbours/condo corporation about the impact of your tenants. Of course, you can delegate a lot of these responsibilities but that generally comes at a cost and you need to take care that you choose the right option. While some individual people might offer these services, a registered and professional property management company can provide end-to-end service and will also be backed by comprehensive insurance policies that you will benefit from.
Vacancy rate is important
The vacancy rate is the percentage of all rental stock in an area that is vacant over a specified period of time. If you’re thinking of becoming a landlord in an area, you want the rate to be as low as possible as it indicates how likely it is that you will be able to rent your property. Consider that the average one-bedroom apartment in Toronto now rents for $2,242. So, for every month your property is unoccupied, you are potentially missing out on at least $2,242. Multiply that by several months and it can make or break your profits for the year and the ability for you to maintain your portfolio; making the vacancy rate a crucial metric to analyse. Currently, much of Ontario has very low vacancy rates, with Toronto’s vacancy rate around 1.1%, making it a good market for landlords and a tough one for tenants.
What’s the Market Value?
If you are thinking of becoming a landlord, you need to have a good understanding of the value of your property; both its resale and rental value. The resale value helps you determine an ideal time to divest in your property (it’s not always desirable to keep a property indefinitely -you have to know when to cash out), and if you are buying the property as part of your portfolio, the current resale value (or purchase price) will also determine what the rate of return will be given the current rental rates and thus affect your potential profits.
Meanwhile, knowing the rental market value can help you to maximise your profits. If you set the price too low, your income will be low and the potential profit will be greatly reduced. If you set the price too high, you might scare off potential renters and end up losing out on potential income while your property is left unoccupied. By analyzing the market value for the area or speaking to a qualified real estate agent who knows the area well, you can find the right price point for your property.
Cap rate is important but it isn’t everything
Capitalization rate (or cap rate for short) is the measure used to determine the potential return of real estate investments. It looks at the theoretical profit that can be made over the course of a year by dividing the net operating income of the property by either its current market value or its value at the time it was purchased. This gives you a percentage that indicates the rate of return of the property, with a larger percentage indicating a greater return value against the purchase price. For example, a capitalization rate of 10% indicates that you are getting back 10% of the value of the property every year.
For landlords, this is can be an important metric to use to help you understand the quality of your portfolio and to assess when and what you should buy and sell. Depending on individual circumstances, though, the cap rate might be considered less important. With the dramatic rise in real estate prices in recent years, many properties are being sold at low cap rates, especially when mortgage payments are taken into consideration. However, this might not necessarily be a bad thing. With a strong rental market leaving vacancy rates low and property prices continuing to rise, the carrying costs might be acceptable to many investors when the increasing value of a home is taken into consideration.
For example, if after all payments (including mortgage) are taken into consideration, your rental property operates at a loss of $200, you have to keep in mind that the $200 monthly payment is acquiring you a property. Even if it is a higher monthly payment, you may consider it worthwhile since it will boost your net value considerably.
There are laws… lots of them
Tenancies in Ontario are governed by the Residential Tenancies Act (RTA), which came into effect in 2007 and was updated in 2017 as part of the Liberal government’s Rental Fairness Act. The RTA is a wide-ranging act that covers the rights of tenants and defines what landlords can and can’t do. There is too much within it to describe in this article but, suffice to say, if you are about to become a landlord it is important to familiarize yourself with the main points of the act to insure yourself against any potential breaches of the law and heavy fines that might follow.
You need to research tenants carefully
Selecting the right tenant for your property can save you a lot of headaches and heartaches. Unfortunately, when it comes to renting, not all tenants are created equally. There are dream tenants who you never hear from and care for your property as if it was their own; there are nightmare tenants who miss payments, damage your property, bother their neighbours, and generally cause problems; and there is just about everything in between.
While it is impossible to know exactly what a tenant will be like, there are red flags you can look out for to reduce the chances of landing a bad tenant. Ask for credit reports to gauge the likelihood of them missing payments, call their references to get an idea of their character, call their employer (or school if dealing with a student) to verify their employment or status as a student. Be careful not to ask too much, however, and do not discriminate based on race, religion or sexuality as, aside from being morally reprehensible, this could leave you in legal trouble.