For the average person, trying to anticipate what’s coming next in the real estate market is like trying to predict the weather in April. And deciding whether to invest in real estate in today’s market can be even more confusing. Our real estate experts share great advice on the risks and rewards of residential rental properties and what to watch for when making the leap to becoming a landlord.
Types of Rentals
Today’s investors will need to consider what sort of rental unit they want to purchase and how they will make enough money each month to cover their mortgage and expenses. If they’re limited to a 20% down payment, they may need to think outside the box to create more cash flow.
For example, a $1 million home today will require a $200,000 down payment with a monthly mortgage of approximately $5,100 at 6% interest over a 25-year amortization period. As an investor, consider whether you can create a basement apartment. Or if the home can be converted into a duplex or triplex. Factor in all your renovation costs while making your decision about a property.
Short-term rentals are still popular, depending on your location. In Hamilton, the bylaws state that a short-term rental is only legal in your primary residence.
In other words, you are legally allowed to rent your home for a short period if you are away, or you can rent a room or separate unit like a basement suite.
“If you’re looking for a vacation property to rent, consider northern locations that are affordable but growing in popularity,” Luke O’Reilly from The O’Reilly Group shares. “Some investors look for land in rural areas and put up a yurt or tiny home where zoning allows.”
Student housing is attractive as there will always be a need in areas near a university or college. “With student rentals, you can charge per room, so it is more lucrative,” Kevin Girard from Royal LePage State Realty explains. “The downside is it puts more wear and tear on the house, and you may experience higher turnover.”
Risks to Consider
As much as a rental property can be quite lucrative, it does come with risks. Be sure to buy in an area you’re familiar with or spend the time doing research.
Determine how available you will be for repairs and renter turnover. Short-term rentals require more frequent cleaning and maintenance, so you must decide whether to manage this yourself or hire a property management company. The first option costs time, while the second costs money.
“Understand the zoning and make sure you are allowed to create a duplex, for example,” says Kevin. “You will need to understand the building code, height restrictions for basement apartments, and what parking is allowed.”
Buying without a long-term strategy can also create risks for the investor. “Investors who bought rental properties during the peak hoping to flip may be taking a hit now,” Luke says. “But if there’s a long-term plan, prices will rise again, and interest rates will come down.”
Rewards to Explore
Housing prices are much lower than a year ago, and interest rates are predicted to drop, so the best time to buy is now. As rates go down, more cash flow becomes available to the investor.
“The biggest reward is appreciation,” says Kevin. “Real estate doubles about every ten years, so if you put $200-$300 thousand down and wait ten years, you will get a huge return.”
Rental properties provide a steady monthly cash flow and significant income in the long term. Rental income is taxable, but you can deduct rental expenses, mortgage interest, insurance, and maintenance costs.
The prospect of buying a rental property can seem daunting, so surrounding yourself with the right team is the key to success. Be sure to engage with a realtor and a mortgage broker who understand the rental market and discuss significant purchases with your financial advisor.
All decisions come with a level of risk, but with risk comes great reward.
By Julie Achtermeier
