Six steps to take before buying a rental property

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Considering purchasing a rental property can be very exciting. Making passive income and having multiple income streams is a great way to build wealth. The potential for increasing equity in property also lends the potential for property ownership to be very lucrative.  

You’ve come to the right place to learn how to get started to set yourself up for a successful rental property investment. As each investor is unique, you must consider what’s right for you. 


1. Ask Yourself What Tenants You Want 

You’re likely thinking you’d like the best tenants, but what does that mean? Do the best tenants have kids? Families might be less prone to have parties and receive noise complaints from neighbours, but they may also be most likely to have animals, and, let’s face it, kids cause damage too. However, if you’d like to rent to single people, they may be shorter-term tenants or more likely to get loud.  

If you’d like to have professional tenants, you may need to buy a house currently outside your price range. So should you consider purchasing a property in an up-and-coming neighbourhood and put some work into it? Are you doing the work, or will you pay someone else? Or do you wait and save a little longer until you can afford the down payment on a property in a neighbourhood where professionals want to live?  


2. Speak With Your Potential Lender 

Visit your lender and discuss what mortgage loan you could be approved for. If your pre-approval loan is lower than you need, ask the lender what steps you need to take to increase your pre-approval loan to align with your plan.  


3. Check Your Credit 

A good credit score will help keep profits in your pocket instead of paying higher interest rates with lenders. You will also want to make sure that you have a credit rating high enough that your lender will approve your request for a mortgage loan that is in line with your plan. Your lender can advise you what credit score range you will need, but if it is safe to say that if your score isn’t at least 680 or higher, you will be paying higher interest than your peers that have a higher score and qualify for the most competitive loan rates. 

If your score isn’t where you’d like it to be, there are many ways to improve it. Your lender can offer some advice on how to increase your score, and there are many resources online. 


4. Save, Save, Save 

When getting a mortgage, if you do not have a 20% down payment, your lender will require you to purchase CMHC Insurance. As you can only have one CMHC-insured mortgage at a time, if you already have a CMHC-insured mortgage, you’ll need a down payment of 20% or more on the property. If you don’t have a CMHC-insured mortgage yet, you can avoid the 20% down, depending on your credit.  

You will also need to save enough money to pay closing costs when purchasing the property, such as lawyer’s fees, land transfer tax, real estate commissions, etc. Also, consider whether you will need a budget for improvements on the unit. 

If you don’t already have the money saved that you need, make a plan. Automating a withdrawal on payday into a savings account you cannot quickly access is a great way to save a significant amount of money over time.  


5. Speak with a Realtor 

If you are ready to purchase a rental in the next year or so, talk with a realtor about what you’re looking for. They may also have ideas about how to get you into the market faster. Chat with them will get you on their radar and keep you in mind when they come across something that could work for you. It’s also an excellent way to determine if your budget is reasonable for the property you’d like to own. 

Additionally, you can ask them what they think market-rate rent is for the type of unit you want and what the closing costs are likely to be on the property you’re looking for. 


6. Check Your Numbers 

Once you know how much rent you can collect, run your numbers to understand your potential profit. Your lender can help you determine your mortgage payment, but if you’d like to run multiple scenarios, you can do so online with the help of a Mortgage Calculator. You will also need to budget for property taxes, insurance, the water and sewer bill, maintenance and repairs, and any other applicable expenses, such as a hot water tank rental.  

If you own the property in your name, remember to budget for the potential tax bill at the end of the year. All profits on a personally-owned rental are taxed as income. If you are considering incorporating, ask your accountant how much to budget for the corporate year-end, how much to budget for a lawyer to complete your mandatory annual corporate minutes, and how withdrawn profits are taxed. 


When considering whether to incorporate or own the rental in your name, it would be best to speak to your insurance broker. If you incorporate, you will need to purchase commercial insurance for the rental, while it’s possible that the property would qualify for personal insurance if owned in your name.  

If you are able to execute the above six steps before purchasing a rental property, you will put yourself in a great position to have a good experience as a landlord and investor and save yourself from a few surprises along the way! Ready to chat about your rental property insurance, connect with us to get started or complete a quote.