Photo: James Bombales
Buying a home isn’t always about finding the perfect place to raise a family or host those summer barbecues — for some first-time buyers, owning real estate is the gateway into the realm of landlordship.
Becoming a small-scale landlord can look easy, but there’s more to it than collecting the rental cheques every month. Whether you lease out an individual property or have a self-contained rental unit in your home, such as a basement apartment, buying to become a landlord requires you to be a hands-on business owner.
“I tell my clients upfront [that] you’ve got to think of it as a business,” says Nawar Naji, a Toronto real estate investor and broker at Chestnut Park Real Estate. “It’s not just about, ‘Let’s go buy a condo and rent it out.’ You’ve got to think of it from a business perspective. Think of the operation side of it, taxation aspect of it, and the other part of it — the exit.”
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With television shows like HGTV’s Income Property showcasing the benefits of owning a rental property, like easy income and a boost in property value, renting out your basement looks appealing. Yet, without proper preparation or knowledge of provincial landlord and tenancy laws, the landlord dream can quickly go sour.
“If people have a bad experience in the first year [of landlording], and the first tenancy is problem-ridden, nine times out of 10 I would think they would get out of the business,” says Susan Wankiewicz, executive director of the Landlord’s Self-Help Centre, a non-profit legal clinic for Ontario’s small landlords.
If you do your homework and plan accordingly, becoming a small landlord can be rewarding. As Naji and Wankiewicz tell it, here’s what you can expect if you’re working towards that first investment property.
Put your back into it
Landlording isn’t a passive investment — it requires maintenance, time and experience to nurture into a successful money-maker. As with any business, being present and aware of your investment’s unique needs will start you on the path to being a successful landlord.
“You’ve got to be active in the business,” says Naji. “It’s not just paying the mortgage, getting the rental cheque and calling it a day. There’s more work to be done to it.”
Naji, who has been investing in real estate since 2006, says a new landlord can expect the operation stage of landlording — running the property — to be the longest and most cumbersome. Semi-annual inspections, repairs, collecting rent and regular maintenance are the landlord’s responsibility. You could hire a property management company to take care of this for you for a percentage of your rental earnings, but Naji advises not to within the first year of a new investment property.
Photo: Julien Dumont/ Flickr
“[That way] when you pass it on to a property manager, and they call you [about a house issue], you’ll understand if it makes sense or doesn’t make sense,” he says. “If you haven’t done it by experience, somebody can call you and can come up with explanations that don’t necessarily make sense — it might not need any repairs.”
Naji also recommends building a team of professionals that specialize in residential investments. Your accountant, repair person or real estate agent, he says, should have knowledge of landlording in order to fully understand your needs.
Know it like the back of your hand
Legal jargon may be a dry read, but understanding tenancy laws in-depth before you become a landlord could save you a whole lot of trouble down the road.
“Usually we meet landlords once they’ve rented and they’re in trouble,” says Wankiewicz. “If they were to do the front-end research and understand what they’re getting into before they rent, I think they’d be better off.”
Wankiewicz has seen every kind of problem come through the LSHC office: tenants that default on rent; pets that suddenly appear unannounced; damage to the property; and tenants that decided to move their whole extended family into the unit. Whatever the issue may be, Wankiewicz explains that landlords who familiarize themselves with the provincial landlord and tenancy laws beforehand have a better understanding of what their rights are. For instance, she still encounters landlords who haven’t fully read Ontario’s Residential Tenancies Actand don’t understand that the law equally applies to both high-rise and second suite rentals.
“Landlords are surprised because they think that [because] they’re renting in their home and they’re the king of the castle. That’s not the case. They’re subject to the same legislation as if it were a high rise rental,” she says.
Photo: James Bombales
If a tenancy isn’t working out and an eviction is required, Wankiewicz warns that the process isn’t a quick fix. If a tenant stops paying rent, a landlord will need to give a termination notice and apply for a court hearing to the Landlord and Tenant Board as soon as possible.
“What we are seeing now is that it’s taking anywhere from four to six months for a landlord to terminate the tenancy and recover possession of the rental unit,” she says.
The price is right
Buying a house ain’t cheap, nor is saving for a downpayment, so you’ll want to ensure that you can get a return on your first investment property, and it starts with picking the right rental unit.
Naji says to follow the money — wherever there’s construction for a master-planned community or an injection of government funding into infrastructure, there will be a demand for rental housing. Highlights of a specific neighbourhood — proximity to transit, a family-friendly community, lots of amenities — will entice tenants over more space. As Naji explains, buying the largest rental unit on the market might allow you to charge slightly higher rent, but it will cost you more to purchase.
Photo: James Bombales
“If you’re buying the largest two-bedroom, two-bathroom condo, it’s not necessarily the best idea because the tenants are not going to pay more rent,” explains Naji. “They might pay a little more rent, but not enough to justify the additional cost of acquisition for that larger, or extra large, unit.”
Instead of focusing on big bedrooms and living areas, Naji says to look for smaller spaces with appealing characteristics. Tenants are feature focused; they’ll value better appliances or a shorter commute time over a bigger kitchen. A semi-detached could bring you in the same amount of money as a fully-detached home with the same number of bedrooms, but will cost you less to buy.
“It might be a little bit smaller, but your cost of acquisition is less, and the numbers are going the be in your favour because your rent is going to be pretty much the same with a lower purchase price,” he says.
When pricing your rental unit, Naji says to compare current neighbourhood rental prices with seasonal demand to determine the right price.
Meet and greet
With a tenant living on your property, you’ll get to know all of their quirks very quickly. Some landlords aren’t prepared for the extra smells, sounds and interesting habits on display that go hand in hand with having a tenant.
“Landlords in a smaller situation, were they’re renting part of their home, they become consumed with tenant behaviour, like if the tenant has an overnight guest and, ‘They didn’t tell me’, ‘The tenant’s taking too many showers’, or ‘The tenant’s leaving the lights on’, or ‘They brought in a pet and I didn’t approve a pet’— issues like that, small-living landlords are unprepared for,” says Wankiewicz.
The landlord-tenant relationship can sometimes be a rocky one. Wankiewicz emphasizes that in addition to good communication and responding to issues quickly, landlords need to conduct a comprehensive screening process to find a trustworthy tenant. She advises that going off face-value alone won’t provide enough information about a person. Using a rental application, speaking to references and checking a tenant applicant’s credit score are good methods to finding a quality tenant.
“So many times the small landlord will just make their decision on how their tenant appears, but they need to dig in and check with previous landlords, not just where they’re living now, but where they lived prior to that, because that’s where they’re going to get accurate information about what their behaviour was like,” says Wankiewicz.
Naji likes to take a personal approach to rental applications; he strongly recommends meeting prospective tenants in-person not only to check for that gut-feeling, but to get to know the person.
“At the end of the day, this is a people business. You’re renting your property to a person or a couple. It’s good to meet them, get to know who they are.”
Source: Livabl.com – Michelle McNally