Are you thinking about buying a rental property as a way to earn passive income? While this purchase can result in extra income down the road, it requires a lot of time, effort, and money upfront. You may not be living in this property, but you need to maintain it for someone who will. As a result, this investment will cost you money before you can earn it. If you choose to buy a rental property, you need to be prepared for the full experience. Here’s what you should consider before deciding to buy a rental property this year.
Supply, demand, and price outlook
As we move into the spring season, demand for housing is likely to increase as this is one of the busiest times of the year for real estate. With that in mind, you’re likely looking at a competitive spring market, which will encourage higher price increases. Supply is still low, so this will stoke the fire even further. According to Zolo, the average sold price of a home in Barrie is around $963,000, which is an increase from previous months.
Last week, the Bank of Canada increased the target for the overnight rate from 0.25 per cent to 0.50 per cent. This means you will likely start to encounter higher mortgage rates when you go rate shopping and meet with lenders. Keep this in mind if you plan to buy a rental property.
Are your finances in good condition?
Before you buy a second property to rent out, you need to ensure your finances can support it. True, you’re not buying the home for yourself, so you don’t need to budget for the best furniture and accessories. However, you still need to make the home liveable, so you need to budget for the appropriate costs. Plus, you need to determine what kind of property you can afford. Do you want to buy a full house, or a unit within an apartment building? Have you budgeted for closing costs and property taxes? Remember, you won’t be earning income right away from a rental property. These immediate costs fall on you, and you’ll likely be using tenants’ rent and your own finances to pay for these debts. Make sure your financial situation is already in good shape before you take on new debts.
Mortgage considerations
Getting a mortgage to buy a rental property is tricky. Unlike securing your mortgage for your own home, this is a second property you won’t be living in. To add on top of your first mortgage with a second one, lenders will want extra assurance that your finances can handle it. This is both to prove you can pay for this new mortgage, and still maintain your own. If you haven’t fully paid off your mortgage yet, you will need to give extra proof to lenders. Plus, you can’t bank on rent for making these payments. Lenders want to see proof of funds outside of potential tenants, in case your unit isn’t rented out at all times. Of course you can use rent to contribute to your monthly payments, but it won’t be a sufficient proof of funds for lenders.
Are you prepared to be a landlord?
Beyond financial considerations, you also need to think about whether you’re prepared for the responsibility of being a landlord. You will be in charge of major maintenance of appliances and the home itself, such as heating, stove and ovens, roofing, etc. If something breaks, you will have to replace it or hire someone who will, like electricians or plumbers. Plus, you need to be accessible to tenants if they need assistance, as you are their main point of contact. Be sure you also create a specific lease agreement with tenants, as well as a payment schedule. As the landlord, you are responsible for making the terms of the lease clear.
Do you have an area in mind?
When you buy a rental property, it’s best to do so in an area you’re familiar with. This doesn’t mean the property has to be your next door neighbour – any city or town you know well will work! When you have a deep understanding of the area, you understand how much your property is worth, and how much you can reasonably expect for rent. Otherwise, it can be a guessing game to try to know how much to charge. You might either get way less than possible, or have trouble finding tenants if you charge too much. You can also better answer questions about amenities and transit if you know the area well. If you can buy in an area with easy access to public transportation and malls, this will likely increase the property’s value too.
You’re in it for the long haul
Buying a rental property is a long-term commitment, and one you need to take responsibility for. Just like buying your own home, owning a rental property will come with a mortgage and mortgage terms that will have penalties if you break them. If you decide you don’t like being a landlord, you will have trouble exiting your mortgage and selling the property without facing pre-payment penalties. You should be very sure you’re ready for this commitment and its responsibilities before going forward.
Reach out to a broker first
If you think this investment interests you, get in touch with a mortgage broker. Even if you’re already a homeowner, buying a rental property is a different game, and you likely don’t know all the ins and outs of the process. The approval process will be different, and so will the documents you need to provide. Brokers can help you find appropriate lenders and products for this purchase to ensure it goes as smoothly as possible.
If you’re looking to buy a rental property and need help securing a mortgage, get in touch with me!