Are you thinking about investing in your first rental property? It’s a big step. But with careful research and some time and effort, it can be a great way to generate a passive income.
There’s a lot to consider before you start your journey to becoming a real estate mogul. In this article, we’ve put together a list of some important information that can help you on your road to building your real estate empire.
Is a real estate investment the right fit for you?
Great risks can yield great rewards. But consider the risks of an investment property: securing a mortgage, maintaining a budget for operating costs, securing reliable tenants who will pay their rent on time and securing a maintenance fund— just a few of the important issues to think about.
Many aspiring investors think that they will begin making a profit from their investment right away. That rarely happens. Operating costs that are too high, a heavy mortgage, vacancies that you have to cover— these can seriously eat away at your profits and leave you with next to nothing— and that’s before you deal with marketing, property taxes and other bills. All of these issues can seriously derail you if you fail to plan for them in advance. But if managed carefully, an investment property can net considerable financial rewards over time.
Your Financial Situation
Can you secure the mortgage necessary to purchase an investment property? Do you carry a high debt load? Both of these questions need careful consideration before proceeding.
Lenders typically like to see a debt-to-income ratio of less than 36%. An investment property does not qualify for mortgage insurance so the amount needed for a down payment is higher than when purchasing a family home (20% for investment properties vs 5-10% for family homes). You also need to consider closing costs and emergency funds.
Are you prepared to manage your investment property on a day-to-day basis? If your goal is to buy it and forget it, you need to consider a property management company. They will deal with the daily management of your property including finding and vetting potential tenants, collecting the rent, and handling any maintenance issues that come up.
One additional benefit of using a property management company is the freedom to purchase a property anywhere the law allows and take advantage of markets where the financial rewards are greatest.
Location, Location, Location
In the case of an investment property, “where” is often more important than “what”. For example, the hottest place to purchase an investment property in Canada right now is in Guelph, Ontario. You want your property to be where the people are. A beautiful vacation home, in a place no one visits, will not be a successful investment but a fixer-upper in an urban center will probably recoup your renovation costs and make you a tidy profit. Do your research before you settle on a location.
The 1% Rule
What Is the One Percent Rule?
Simply put, it means that the monthly rent earned from an investment property should be no less than 1% of the price of the property. This will ensure that you at least break even. A good rule of thumb is to never get a mortgage where the monthly payment is more than the amount received from your monthly rent. It’s best if the mortgage is less than that one-percent.
There are lots of other things to think about before purchasing an investment property. Research is key to success, and hopefully, this list will provide you with a good starting point.
Source: First canadian Title – Nov 19th, 2020 | By FCT
Some remodeling projects go on for weeks and make a mess of your home life. Here’s how to survive.
Renovations can take weeks — and sometimes months. That means endless days of subcontractors traipsing through your home, noisy tools, and major dust. Even some minor projects can disrupt your daily routine. Before you begin to remodel, know what’s in store for you and your family.
We’ve highlighted nine common remodeling projects that homeowners are likely to undertake — projects that require professional contractors and that take at least one week to complete.
We also talked with veteran remodeler Paul Sullivan, who has renovated homes for 34 years and is president of The Sullivan Company in Newton, Mass.
Sullivan helped us rate each project on a “disruption scale” of 1 to 10, with 1 being the least disruptive to your everyday home life and 10 the most. If your project reaches a 10, consider getting a hotel room for the duration.
National median cost: $75,000
Time: 8 to 10 weeks
What’s involved: A project that converts unconditioned attic space into a bedroom must include egress windows and at least one closet. Most likely, you’ll extend plumbing, HVAC ducts, and electrical wiring to the attic, and add insulation, drywall, and flooring.
Disruption scale: 3 Luckily, most of the work is in the attic and doesn’t involve your main living areas. You’ll have to put up with contractors moving through the house to get to the top, so provide drop cloths or old rugs to protect your floors. Also, plaster dust from drywall installation and finishing likely will float throughout your home, so you’ll want to change furnace filters every two to three weeks during the project.
Refinishing Hardwood Floors
National median cost: $7 per square foot
Time: 2 to 14 days
What’s involved: Sanding, staining, and sealing wood floors.
Disruption scale: 9 Whether you’re refinishing one floor or an entire house, the process involves a world of hurt. You have to move furniture and cover surfaces to protect from wood dust, which disrupts the flow of family life. And if you use oil-based sealants, you’ll have to live somewhere else to avoid breathing VOC fumes. Plus, you won’t be able to walk on floors for at least two days after the last coat of sealant is applied.
What’s involved: Turning your outdated bathroom into a dream spa includes updating plumbing fixtures, installing ceramic tile around a porcelain-on-steel tub, replacing an old toilet with a low-flow, comfort-height model, and installing ceramic floor tiles and solid-surface vanity counters.
Disruption scale: 7 to 10 If you’re remodeling your only bathroom, expect major disruption of your personal hygiene routine. You’ll have to wash in the kitchen sink, and install a portable potty in the yard or make friends with a neighbor when nature calls. You’ll have less pain if you have more than one bathroom in the house. Even then, you’ll suffer water outages during plumbing updates. And if you’re remodeling a master bath, you must put up with workman tromping through your bedroom.
What’s involved: Replacing cabinets, installing a kitchen island and countertops, replacing appliances, adding lighting, and changing flooring.
Disruption scale: 8 Kitchens are the heart of the home, so when they’re down, you’ll eat out more, wash coffee cups in bathroom sinks, and hold family meetings in the family room where your microwave and fridge now live. To ease the disruption, your contractor can easily set up a construction sink somewhere by running a couple of hoses from existing kitchen plumbing through the dust wall to a make-shift kitchen in an adjacent room.
National median cost: $35,000
Time: 1 to 2 weeks
What’s involved: Replacing cabinet box fronts, adding new hardware, updating appliances, sinks, and faucets, and installing new flooring.
Disruption scale: 5 Kitchen facelifts are less disruptive merely because they’re finished faster than major remodels. You’re mainly pulling and replacing, so plumbing and electrical can stay put, and you’ll still have access to your fridge until the new one arrives.
National median cost: $40,000
Time: 2 to 3 weeks
What’s involved: Finishing the lower level of a house to create a playspace and video area for kids.
Disruption scale: 2 Seems counter-intuitive, because turning unfinished space into extra living space requires all the finishes of a new addition — electrical, flooring, wall surfaces, and insulation. But the good news: Work is confined to a part of the house you rarely use. Contractors can enter and exit through the basement door (if you have one), and noise and dust are easily confined. The biggest disruptions come from periodic electrical outages.
Roofing Replacement (Asphalt Shingles)
National median cost: $7,500
Time: 1 week
What’s involved: Removing and replacing roofing moisture barriers, flashing, and shingles.
Disruption scale: 1 Replacing your roof is one of the least inconvenient remodeling projects you can do. You’ll have to put up with some banging, move your cars away from the house, and keep dogs and kids out of the yard during the demolish phase. Roofers will cover the ground around the job to corral debris; and after the job, they’ll go over your yard with a magnetic roller to pick up stray nails.
Siding Replacement (Vinyl)
National median cost: $13,350
Time: 1 to 2 weeks
What’s involved: Removing and replacing old vinyl siding with new vinyl siding.
Disruption scale: 3 You’ll endure lots of banging around your house as the new siding goes up. If noise bothers you, stick in your earbuds and listen to something soothing. Even though contractors will cover the area around the house, expect some debris to litter the yard. Keep curious kids and pets inside while work is being done to avoid accidents.
Your security deposit is not supposed to be used as last month’s rent.
It is now illegal in New York state for landlords to require you to pay last month’s rent in addition to a month’s security deposit when you sign a lease. New rent reforms clearly state that in nearly all cases, “no deposit or advance shall exceed the amount of one month’s rent.”
Nor can landlords require renters with bad credit histories or annual salaries less than 40 to 45 times the monthly rent to pay multiple months of rent up front. In the past, they’ve typically asked for anywhere from three to 12 months worth of rent.
The new law lowers financial barriers to renting an apartment in New York City, a good thing for most renters. But it complicates things for renters who don’t meet the landlords’ income requirements (including students and retirees), have a blemish on their credit record or no credit history at all, such as international renters.
Elizabeth Stone, the managing agent at Stone Realty Management, says the protections may backfire. “We are going to require guarantors or just reject the tenants outright. So those that have lower incomes are going to miss out because landlords are not going to take the risk,” she says.
A lease guarantor is someone who lives in the tri-state area and earns an annual salary of around 80 times the monthly rent. Another option is an institutional guarantor like Insurent (a Brick Underground sponsor), which charges renters a fee for the service, usually 70 to 85 percent of one month’s rent for U.S. renters and 90 to 110 percent of one month’s rent for international renters without U.S. credit history for the 12 to 14 month lease.
What’s the difference between a security deposit and last month’s rent anyway?
Your security deposit covers the cost of repairing damages to your apartment, while your last month’s rent is pretty much what it sounds like. The two are not supposed to be interchangeable.
While the security deposit is capped at an amount equal to one month’s rent, it doesn’t change the fact any rent paid in advance and the deposit are different things and a landlord is entitled to deduct money from the deposit for any costs associated with damage to the apartment when a tenant moves out.
Your lease will make clear what the security deposit is for; it’s designed to make sure you leave a clean, undamaged apartment with a working set of keys so the landlord can easily rent the unit to someone else.
In most buildings with more than six units, the landlord is required by law to put the security deposit in escrow, giving the tenant more protections than if the money was in a private account.
The practice of not paying the last month’s rent
Some New Yorkers claim they never pay their last month’s rent, figuring the security deposit can stand in as the rent.
Adam Frisch, managing principal at Lee & Associates Residential NYC, a real estate company representing building owners in Manhattan, says a tenant might tell a landlord, “I’m not going to initiate the final rent payment and you can keep my security and there’s nothing you can do about it.” He says they are right, “there isn’t much we can do about it,” but if there’s damage to the apartment, a landlord would be entitled to sue to recover the costs.
“Tenants have gotten away with this and will continue to do so, but they are not supposed to,” he says. Certainly, in situations where the apartment needs nothing more than a lick of paint, there’s no loss to the landlord.
Getting landlords and tenants in sync
In the past, the security deposit was legally required to be returned in a ‘reasonable’ time frame, a vague term that gave renters no reassurances. Landlords must now pay back the security deposit within 14 days of the end of the tenancy.
This has some landlords furious, saying the timing is too tight to assess and price out any damage or close the escrow account where the security is held. They are also required to do walk-throughs at the beginning and end of a tenancy so any damage can be properly itemized.
If walk-throughs allow renters to work towards correcting any issues and they know they will get their deposit back promptly, it’s possible landlords may find it cuts down on the practice of using the deposit as the last month’s rent.
Stone disagrees, pointing out the kind of tenant who makes a landlord take the security deposit as the final rent payment is the same kind of tenant who doesn’t take care of their rental during their tenancy.
“Limiting how much money [a landlord] can take up front and limiting the security deposit is designed to stop tenants being excluded from some of these apartments but I don’t think in practicality, it will work for them,” she says.
Source: BrickUnderground -DECEMBER 23, 2019 BY EMILY MYERS
New year, no vacancy. Renters in cities across Ontario will spend another year struggling to find rental housing as prices continue to rise in the face of tight market conditions.
In 2019, the vacancy rate was 1.6 percent and it will likely drop further through 2020 to a near record low of 1.5 percent, according to Central 1 Credit Union economist Edgard Navarrete. For context, the vacancy rate for Ontario’s rental market averaged 2.6 percent between 1991 and 2018.
In his 2019-2022 housing forecast published at the end of 2019, Navarrete noted that the province has seen a substantial uptick in completed new rental units over the last three years. Through the same 1991 to 2018 period, the average number of new rental units added to the market was 1,500. From 2017 to 2019, the average increased to 7,000 units.
The trouble is that increase still doesn’t satisfy the demand for rentals in some of the province’s most competitive markets, especially Toronto, which is said to have the worst rental supply deficit in Canada.
“Government investments in rental housing will continue to add to the rental universe but expect [the province’s] rental vacancy rate to remain stubbornly lower than the long-term average due to continued strong demand from immigrants settling in Ontario and existing renters opting to remain in rental longer until they have a sufficient down payment to qualify for a mortgage loan,” wrote Navarrete in the Central 1 Housing Forecast.
Unfortunately, the main takeaway here for Ontario renters is monthly rents will continue to climb above inflation as long as this sharp disparity exists between rental supply and persistent demand. Navarrete singles out Toronto, Ottawa-Gatineau, London, Kitchener-Cambridge-Waterloo and Hamilton as markets where rental prices will log especially steep increases and bidding wars will keep intensifying. These cities will feel the strain on their rental markets particularly acutely because they are set to absorb the most new residents to the province.
There is hope for a rental unit supply uptick in the next few years, but for those looking for a new rental this year, it’s unlikely to offer much relief. The provincial government under Premier Doug Ford rolled back the rent control measures introduced by the Wynne Liberal government just a couple years earlier. With more flexibility to price rental units in response to market demand, investors are more likely to see condos as a solid long-term moneymaker and purchase units to add to the rental market.
These investor-owned condos are known as the “secondary rental market” since they are not built for the sole purpose of being added to the rental pool. Purpose-built rental units are known as the primary rental market.
The caveat is that the positive market changes this policy shift from the Ford government intended to inspire won’t be felt for at least a few years.
“If we see a large number of investors entering the market today, with the average completion time of high-density housing such as condo apartments anywhere from two to three years from the time shovels hit the ground, it wouldn’t be until after 2022 when the increased rental market supply will alleviate some of the pressures from the primary rental market,” wrote Navarrete.
Despite what many of us math-allergic folk would prefer, real estate does involve some math. Luckily, most of the formulas are simple and straight-forward. In fact, if you can master the calculations below, you should be just fine.
The Top 8 Real Estate Calculations Every Investor Should Memorize
Net Operating Income / Total Price of Property
Total Price (Purchase + Rehab): $300,000
$25,000 / $300,000 = 0.083 or an 8.3 Cap Rate
This calculation is mostly used for valuing apartment complexes and larger commercial buildings. It can be used for houses and small multifamily too, but operating expenses are erratic with houses (because you don’t know how often and how bad your turnovers will be).
You want to have a cap rate that is at least as good, preferably better, than comparable buildings in the area. I almost always want to be at an 8 cap rate or better, although in some areas, that’s not really possible. And always be sure to use real numbers or your own estimates when calculating this. Do not simply use what’s on the seller-provided pro forma (or as I call them, pro-fake-a).
Monthly Rent / Total Price of Property
Monthly Rent: $1,000
Total Price of Property (Purchase + Rehab): $75,000
Rent/Cost = $1,000 / $75,000 = 0.0133 or a 1.33% Rent/Cost
This is a great calculation for houses and sometimes small multifamily apartments. That being said, it should only be used when comparing the rental value of like properties. Do not compare the rent/cost of a property in a war zone to that in a gated community. A roof costs the same, square foot for square foot, in both areas. And vacancy and delinquency will be higher in a bad area, so rent/cost won’t tell you what your actual cash flow will be. The the old 2% rule can lead investors astray, and they shouldn’t use it. But when comparing like properties in similar areas, rent/cost is a very helpful tool.
According to Gary Keller in The Millionaire Real Estate Investor, the national average is 0.7%. For cash flow properties, you definitely want to be above 1%. We usually aim for around 1.5%, depending on the area. And yes, I would recommend having a target rent/cost percentage for any given area.
Annual Rent / Total Price of Property
Annual Rent: $9,000
Total Price (Purchase + Rehab): $100,000
Gross Yield = $9,000 / $100,000 = .09 or a 9% gross yield
This is basically the same calculation as above but flipped around. It’s used more often when valuing large portfolios from what I’ve seen, but overall, it serves the same purpose as rent/cost.
Debt Service Ratio
Net Operating Income / Debt Service
Annual Debt Service: $20,000
Debt Service Ratio = $25,000 / $20,000 = 1.25
This is the most important number that banks look at and is critical for getting financing. Generally, a bank will look at both the property’s debt service ratio and your “global” debt service ratio (i.e. the debt service ratio of your entire company or portfolio).
Anything under 1.0 means that you will lose money each month. Banks don’t like that (and you shouldn’t either). Generally, banks will want to see a 1.2 ratio or higher. In that way, you have a little cushion to afford the payments in case things get worse.
Cash on Cash
Cash Flow / Cash In Deal
Cash Flow (Net Operating Income – Debt Service): $10,000
Cash Into Deal: $40,000
Cash on Cash: $10,000 / $40,000 = .25 or 25%
In the end, this is the most important number. It tells you what kind of return you are getting on your money. In the above example, if you had $40,000 in the deal and made $10,000 that year, you made 25%. This is a critical calculation not only when it comes to valuing a property, but also when it comes to evaluating what kind of debt or equity structure to use when purchasing it.
The 50% Rule
Operating Income X 0.5 = Probable Operating Expenses
Operating Income: $100,000
Operating Expenses = $100,000 * 0.5 = $50,000
This is a shorthand rule that I judge to be OK. It is for estimating the expenses of a property. Whenever possible, use real numbers (i.e., the operating statement), but this is good for filtering out deals that don’t make sense. Just remember, a nicer building will have a lower ratio of expenses to income than a worse one and other factors, like who pays the utilities come into play. Don’t simply rely on this rule.
Strike Price = (0.7 X $150,000) – $25,000 = $80,000
This is another rule like the 50% rule, although I think this one is better. This one is for coming up with an offer price. Always crunch the numbers down to the closing costs before actually purchasing a property. But if you offer off the 70% rule, you should be just fine as long as your rehab estimate and ARV (after repair value) estimates are correct.
Comparative Market Analysis
Unfortunately, there’s no real calculation for this. It’s mostly used for houses, and it’s all about finding the most similar properties and then making adjustments so that a homeowner or investor would find each deal identical. The MLS is by far the best for this, but Zillow can work too (just don’t rely on the Zestimate). For a more detailed explanation, go here.
In the end, the math isn’t that bad. No rocket science here luckily. Instead, there are just a few handy calculations and rules to evaluate properties before purchase and analyze their performance afterward. Memorize these, and you should be fine.
What formulas do you use to analyze your deals? Any calculations you’d add to this list?
The mention of rent control is enough to make most apartment investors shudder—the notion of artificially capping rents flies smack in the face of American capitalism. But there are several misconceptions about rent-controlled properties. For some, they can be a great addition to their investment portfolios.
The Cons of Rent Control
Rent control regulations can be difficult to navigate.
Rent control regulations can be regulated at either the city or state level—or both. The state of California, for instance, allows rent control, but the decision is made at the local level as to whether to adopt a rent control policy.
It’s not uncommon for two adjacent communities to have different policies, one with rent control and the other not. The landscape is continuously evolving; investors need to track these regulations closely as there are routinely efforts (like ballot measures) to change policies.
Your ability to increase rents is capped each year.
Depending on the community, it’s possible that the rent control policy will prohibit landlords from raising rent more than 2 percent each year–in other words, rent increases essentially just keep pace with inflation. This may be completely out of line with market averages, particularly in hot-market cities, where rents have experienced double-digit increases over the past several years.
This ceiling can make deals less attractive to investors in search of strong cash flow.
Typically, low turnover is a good thing as far as apartment investors are concerned. However, some rent control policies stipulate that rents are capped each year until an apartment becomes vacant, at which point the landlord can increase the rent to market rate and then the new cap takes place each year thereafter under the existing tenancy.
To bring units to market rate, they must turn over at least every few years–but tenants in rent-controlled units tend to stay longer than average (sometimes 30-plus years!).
There’s less incentive to improve properties.
One unintended consequence of rent control is that, unable to increase rents, there’s no incentive to invest in a property beyond routine repairs and maintenance. Over time, this can lead to a deterioration (and therefore, value) of the property.
If you decide to sell in the future, your pool of buyers may be smaller.
Given the challenges associated with rent-controlled properties, some investors will never even look at these deals. This inherently shrinks the pool of potential buyers when it comes time to sell.
Rent-controlled properties tend to have lower acquisition costs.
Investors typically use the current rent roll as a major factor when determining the value of a property. Rent-controlled properties, particularly if multiple units are below market rates, are therefore valued lower than what the free market would bear.
This results in lower acquisition costs, which may be a good way for an investor to enter a market they’d otherwise be priced out of by investing in a rent-controlled property.
You CAN increase rents.
Contrary to popular belief, landlords CAN raise rents in a rent control environment—they’re just limited as to by how much each year.
For instance, Oregon just passed a statewide rent control ban this past year that caps rent increases at 7 percent plus inflation annually. That’s a total of 10.3 percent this year. Statewide, rent growth has slowed to less than 2 percent a year since 2016, so the new law makes little difference to landlords looking to increase rents.
There are usually policies in place to challenge the cap.
No community wants to see their housing stock decline. To prevent this, most rent control regulations contain provisions that allow investors to challenge the cap when making substantial renovations or improvements to the property.
Rent-controlled properties tend to have consistent cash flow.
Because rents are lower, and because tenants tend to stay in place longer, rent controlled properties tend to have consistent cash flow. What’s more, tenants in rent-controlled properties are less likely to move out during a downturn, which helps investors weather the ups and downs that are inevitable over the course of multiple real estate cycles.
Ultimately, the decision as to whether to invest in rent-controlled properties is a personal one. Rent control regulations can vary so widely–from highly restrictive policies in cities like New York and Los Angeles, to the more flexible rent control policy recently adopted in Oregon.
Anyone considering investing in an area with rent control should spend the time needed to understand the nuances of the policy. One misstep in violation with a rent control law could cripple an otherwise promising investment.
Would you invest in a rent-controlled property? Why or why not?
The Local Planning Appeal Tribunal recently dismissed the appeal of the City council-approved zoning regulations for short-term rentals, so Toronto will soon have a different rental landscape.
“This is good news for Toronto residents and a step in the right direction when it comes to regulating short-term rentals and keeping our neighbourhoods liveable,” said Mayor John Tory in a release. “When we approved these regulations in 2017, we strived to strike a balance between letting people earn some extra income through Airbnb and others, but we also wanted to ensure that this did not have the effect of withdrawing potential units from the rental market. I have always believed our policy achieves the right balance which in this case falls more on the side of availability of affordable rental housing and the maintenance of reasonable peace and quiet in Toronto neighbourhoods and buildings.”
There are a few new rules that will be implemented soon. Short-term rental will be permitted across the city in all housing types, but only in principal residences (and both homeowners and tenants can participate). If you live in a secondary unit, you can rent out your home short-term, but only if the secondary unit is your primary residence.
You’ll be able to rent up to three bedrooms or your entire residence. If renting your entire home while you are away, you can do so for a maximum of 180 nights a year. If you are renting out any part of your home, you must register with the City and pay a $50 fee.
For companies like Airbnb, they will have to pay a one-time fee of $5,000 to the City, plus $1 for each night booked. This way, the city is benefitting from the success of a company that is leveraging local housing to make a profit.
There will also be a Municipal Accommodation Tax of 4% that you will have to pay on any short-term rentals less than 28 consecutive days. Companies like Airbnb will be able to volunteer to collect and pay the MAT on behalf of their users.
It seems like these changes will mostly impact the condo rental market. Most investors renting their condo units through companies like Airbnb are not renting out their principal residence; it’s usually a secondary residence. Without short-term rental income as an option, we could see a slight drop in investors in the new condo market. Fewer investors means less sales and more supply for end-users. This could result in price moderation or even a price drop in the pre-construction market.
We could also see some condo units hitting the resale market and long-term rental market, as investors look to other options to profit off their properties.
There will be a transition period as investors figure out what to do with their condo units, but in the long-run, this change seems to make sense in that it delivers more supply to the people who are living in the city, as opposed to just visiting.
A provincial tribunal has ruled in favour of Toronto’s plan to put stricter regulations on the city’s short-term rental market.
The Local Planning and Appeal Tribunal (LPAT) made its decision Monday, nearly two years after the city first approved the bylaws.
Under the rules, Toronto will require short-term rental operators to live at the home they list on sites such as Airbnb.
Operators will also be allowed to rent a maximum of three bedrooms in their home or their entire property. They will be required to register with the city to rent out space in their homes.
In his ruling, adjudicator Scott Tousaw described the regulations as “good planning in the public interest.”
“This is good news for Toronto residents and a step in the right direction when it comes to regulating short-term rentals and keeping our neighbourhoods liveable,” said Toronto Mayor John Tory Monday in a written statement.
The regulations are essentially designed to increase the availability of long-term rentals by decreasing the number of homes eligible to be listed on sites like Airbnb and VRBO.
However, the rules were not implemented due to multiple appeals made to the LPAT, formerly known as the Ontario Municipal Board. The appeals were launched by several short-term rental operators seeking to challenge the city’s bylaws.
The LPAT ruling means the city can now move ahead with the regulations.
Ana Bailão, Toronto’s deputy mayor and housing advocate, said the ruling strikes a fair balance that will benefit both tenants and homeowners looking to leverage their properties.
LPAT rules in favour of City’s short-term rental by-law: regulation is a “reasonable balancing…has a solid basis and planning rationale.” After a long appeal, we can now move forward protecting long-term rental suites while still allowing short-term rentals where reasonable.
Airbnb and other companies operating in the short-term rental market will now be required to pay a one-time license fee of $5,000, plus $1 for each night booked through their platform.
Rental operators will also be charged with a four-per-cent municipal accommodation tax on all rentals that last less than 28 consecutive days.
Thorben Wieditz of Fairbnb, a coalition that represents the hotel industry, along with property owners and tenants, called the decision a “major victory for tenants across Ontario.”
The LPAT decision notes that some 5,000 units could return to the long-term rental market with the new regulations, though that number may also be somewhat lower, depending on how operators respond to the changes.
“Whatever the number, one fact is indisputable: each dedicated [short-term rental] unit displaces one permanent household. That household must find another place to live,” Tousaw wrote.
“This phenomenon is occurring in increasing numbers in Toronto’s residential areas, the very places that are planned, designed and built to provide housing for residents.”
With the booming sharing economy and travellers often preferring to forgo traditional hotel stays, the notion of renting out a room in your home (or the entire house itself) could seem appealing. But before you jump into peer-to-peer short-term rentals, there are some things you should consider:
Costs of hosting: starting up, cleaning, higher utility bills and more
Becoming an Airbnb host requires some startup cash along with ongoing expenses. These include the costs to set up and furnish the space, ongoing utility and cleaning fees which is usually not more than $30 per room.
You’ll want to make sure each guest space is attractive and has all the amenities that a weary traveller needs such as fresh backup sheets and plenty of towels. A savvy host can reasonably furnish an empty room for about $1,000. However, $500 can do the trick if you already have an extra bed. Big box stores can help supply furniture for a range of pricing.
The upside of being a host is that if you work hard, possess excellent customer service skills and treat the platform like your own personal business, the revenue generated from the listing can surpass the initial startup costs and provide a nice monthly return.
If your property is controlled by a homeowners’ association or co-op, check its rules to make sure you’re allowed to host; some may restrict Airbnb activity, while others may have no issue. If you rent, you’ll want to get your landlord’s blessing.
A proportion of Airbnb hosts could very well be renters, who may or may not be telling their landlord. It is recommended to get your landlord’s approval through a signed agreement. In most Canadian provinces, tenants cannot rent out their apartments without the approval of their landlords.
Airbnb Canada details here how tenants should go about this process.
Taxes and business licenses
Depending on where you live, you might require a business license and you might owe local taxes on any income you earn.
Quebec law requires short-term rentals of less than 31 days to obtain a licence from Tourism Quebec. Vancouver has proposed regulations that only allow the issuing of short-term rental licences for a primary residence — meaning the host, whether owner or tenant, must live in the dwelling. This rule targets hosts with multiple investment properties who operate as commercial hosts and eat into the housing stock.
Toronto has proposed a two-pronged approach to licensing, requiring both companies such as Airbnb and hosts to register and pay an annual fee. Hosts of short-term rentals in Toronto would be required to pay an annual fee ranging from $40 – $150.
As tax is a relatively complex topic, Airbnb has provided some information about local regulations in different Canadian markets. Above all, it’s good to consult a tax professional to get more specific information.
Clean + Declutter
You’ll want to tidy your space, present it in the best possible light and hide your valuables before you photograph it.
Like the listings you love to peruse here on REALTOR.ca, the photos and listing title are the first thing a potential guest will see on Airbnb. This is your opportunity to catch their attention.
You can either take your own photographs or contract out a professional photographer. Many hosts opt for professional shots, given how important eye-catching photos are for your space’s profile.
Before photographing, ensure that you prep by arranging suitable lighting conditions and use a quality camera (now available on most smartphones).
Insurance and liability
Airbnb’s Host Guarantee provides up to $1 million in insurance coverage for property damage in 29 countries, including Canada, the United States and the United Kingdom. Airbnb’s insurance is not a substitute for homeowner’s or renter’s insurance and it doesn’t protect against theft or personal liability.
Airbnb states that damage to a host’s property (home, unit, rooms, possessions) in every listing is covered up to $1 million USD. However, hosts must provide documentation as part of the resolution process. Payments made through the Host Guarantee are “subject to Host Guarantee Terms and Conditions,” meaning there are exclusions, limitations and conditions. As well, it’s common for Airbnb hosts to receive emails from Airbnb, at random, informing them that various terms and conditions have changed.
Call your insurance company to see what is covered, as some home insurance policies cover short-term rentals. But if there are multiple short-term visits, the insurance company might require you to buy a business policy that would cover a hotel or a bed and breakfast.
Airbnb’s host guarantee doesn’t protect against wear and tear to your place, but you can charge a security deposit to cover possible damage.
Installing a reasonable security deposit is a no-brainer move for new hosts. Airbnb allows hosts to set up a security deposit to cover minor damages that would not be covered under the Host Guarantee. For example, if a guest breaks a door handle while staying at your property, you’ll want to replace that before the next guest comes.
However, Airbnb won’t consider this damage to be major and won’t cover it under the Host Guarantee. As a result, this becomes an out of pocket expense for you, unless you charge the guest a security deposit. When guests make a reservation, they are not immediately charged for the deposit – only if a host makes a claim.
Even if a host is only renting a single room, a security deposit is a safe move just in case anything gets damaged.
Airbnb could require you to refund a guest’s payment if you cancel a reservation at the last minute, forget to leave the key, misrepresent your listing, don’t clean your home or otherwise fail to meet Airbnb’s hospitality standards. Airbnb suggests making sure you’re available during the guests’ scheduled check-in to address any concerns.
Airbnb’s payment system is quick and efficient. Payments are sent through direct deposit after the guest completes their first night (regardless of the length of stay).
When a guest books a host’s space, they also agree to the host’s cancellation policy, which dictates the percentage of the booking costs (minus Airbnb’s cut), if any, they will get back. Most moderate policies allow a guest to cancel within two days of the first night to get their money back. Less moderate policies allow the host to collect more of the booking money.
Host cancellations also happen from time to time. One study found host cancellations are the top complaint on Airbnb, representing about 20% of all complaints.
Depending on when a host cancels a stay, they’ll be deducted either $50 or $100. If a host cancels three or more reservations within a year, Airbnb may deactivate the listing.
To Airbnb or not to Airbnb
If you talk to enough long-time Airbnb hosts, they’ll be able to tell you an endless number of stories about inspiring and interesting guests who shared their home. Others might have bad experiences. There are clear potential advantages and disadvantages to becoming an Airbnb host.
However, if all the regulatory checks are taken care of, the space is up to par and you’re taking your hosting responsibilities seriously, the platform can serve as a nice way to earn extra cash and meet interesting travellers from around the world.
The article above is for information purposes and is not financial or legal advice or a substitute for financial or legal counsel.
The plan will put a heavy focus on housing supply building tens of thousands of affordable housing units over the next decade and repurposing other cash to maintain housing supplements.
There are expectations that the plan will also include a new portable benefit that low-income renters can carry with them through the market.
Those are just two of a number of anticipated measures aimed at making housing in Canada more affordable, particularly for the 1.7 million households that are forced to spend more of their disposable income than they should on housing.
Prime Minister Justin Trudeau will be in Toronto to unveil the details of the plan, while Social Development Minister Jean-Yves Duclos travels to Vancouver to make a simultaneous announcement on the West Coast to mark National Housing Day.
Recently released census data found that 1.7 million households were in “core housing need” in 2016, meaning they spent more than one-third of their before-tax income on housing that may be substandard or doesn’t meet their needs.
Outside of Vancouver, the cities with the highest rates of core housing need were in Ontario. In Toronto, close to one in five households were financially stretched the highest rate of any city in the country.
The government hopes that building 80,000 new affordable rental units, along with billions more in spending over the next decade, will lift 500,000 of those families out of core housing need and help a further 500,000 avoid or get out of homelessness.
The details of how the spending will roll out are of keen interest to housing providers and cities. Municipal leaders have been meeting with federal officials this week to talk about the national housing strategy.
The Liberals laid the financial backbone for the plan in this year’s federal budget, promising $11.2 billion over a decade in new spending. About $5 billion of that money the Canada Mortgage and Housing Corp. is expected to turn into $15 billion by leveraging $10 billion in private investment.
Still, most of the money won’t be spent until after the next election in 2019, which concerns anti-poverty groups.
Those groups are planning demonstrations in multiple cities today, demanding the Liberals spend the full $11.2 billion before the next election.