To be a landlord or not to be? I always wanted to own rental properties but it looked a little scary. Then several years ago, I decided it was time to make the jump. No point in talking about it if you are never going to do it . It wasn’t the best time for me to get into anything new but I figured it would keep my mind away from my day-to-day problems (weird right?). The first purchase was very stressful, you feel like you are taking such a big step. I ended up finding the perfect townhouse and within a week also found tenants. It felt great, I was finally a landlord, I had done it. Now all I had to do was to buy another one, maybe even build a little real estate empire.
I had enough room on my HELOC for the down payment on the second unit, everything was running smoothly. Then at the end of the first year, the tenants in my first unit let me know they were moving out, apparently they weren’t getting along anymore. Wow, already? Looking for tenants can be time-consuming and so is cleaning up between tenants. Here I was, thinking it was going to be easy; get the tenants, just sit back and deposit the rent cheque every month. Well, let me tell you, landlord business is a lot of work!
I read that rental income is passive income! Are you kidding? Rental income is definitely not passive income, maybe it is if you have a property manager (but even then I assume they still need to contact you if something major happens). Most of us, small landlords aspiring to FI, are the property manager, handyman (woman), rental agent, neighbour’s dispute arbitrator, plumber, painter… Don’t get me wrong the income is great and I still think it is one of the best way to increase your wealth with minimum investment, but it is a lot of work and stress. So what did I learn so far as a landlord?
Buying a rental property:
- Do your homework before you buy your rental property. Don’t overpay for the property. I am a real estate addict (yup in addition to being a blog addict, what can I say?) so I check the MLS at least every second day, I focus on several neighbourhood. I like to know what the market is doing and what my properties are worth and I also like to keep an eye for any deals, I have been doing this for years. Your agent will have data too but it is helpful when you also know what you are getting into.
- Check the rental market and determine how much you can realistically get in rent. Here again, your agent should be able to assist you with your research, they have access to a lot of information.
- Buy a rental property near your home. By being close to your property, you can easily check on it periodically (if you want access to the house, you need to give proper notice to your tenants) and quickly drive over when you show the property.
- Once you select the property, make a detailed list of all costs associated with the rental (the seller should be able to provide you with this information) and income. Add a cushion for vacancy and major repairs (I only own condos so most major repairs are covered by the condo but my latest tenants trashed my place and that’s not covered!). You can use the 50% rule to estimate maintenance & repair costs. That is when you assume 50% of the rent will be spent on maintenance & repair over the life of the property (not including mortgage and interest payments). Property cash flow must be positive to even consider buying the property. Check out some of the links at the end of the post for more information on expense estimates.
- Many real estate investors don’t look at properties unless they meet the 1% rule. The rule is that your gross monthly rent must be at least 1% of purchase price, so if you buy a property for $100,000 your monthly rent should be at least $1,000. It is really hard to find properties that meet this rule in some markets. None of my properties meet the 1% rule but they are close enough.
- Don’t forget to account for additional costs associated with your purchase.
- Home inspection: you should always do a home inspection with a certified home inspector. They should be able to point out major issues. Your agent should have a list of inspectors for your area.
- Taxes: In Ontario we have to pay Land Transfer Tax when we purchase a home, it is a % of the value of the house and it can get quite expensive.
- Lawyer’s fees: Some people do all the work themselves. I always hire a lawyer for my real estate transactions, there is no point in taking additional risk if you don’t have to.
- Get pre-approval on your mortgage so you don’t have to add mortgage approval as a condition in your offer. More negotiating power the less conditions you have.
- Negotiate the mortgage rate with your bank. Shop around to see what are the best rates available. Let your bank know you expect them to match or do better. Don’t just accept the rate they are giving you.
- Before signing the agreement with your real estate agent, negotiate a deal where your agent will provide some free credit checks for a specific amount of time when you are looking for new tenants. Otherwise there is a fee associated with it, why not avoid it if you can.
- Negotiate in your offer to have access to the property for showings before closing date. That way you may be able to have it rented on Day 1.
What you should do as a landlord?
- Screen your potential tenants: This is a must! I use a rental application form. Another perk I got from my agent. You can find forms on-line for free , just make sure it includes all the right questions.
- Credit check: A credit score isn’t the only reason to accept or deny an applicant, but it is a useful tool. I currently have one tenant (4th year) whose credit check is really bad but when I called their previous landlords they said they were always on time. Everything else on their application checked out. Their rent is their priority.
- Employment (current and past). A quick call to the current employer to confirm salary and length of service.
- Landlord (current and more importantly previous). This step is critical, call the last two landlords at least. The previous one may just want to get rid of them so call the one before just to be safe. The more the better. This was my mistake with my “nightmare” tenant, I only called the last landlord and she probably desperately wanted them out!
- References: It is often recommended but I haven’t found that one very helpful. They usually write down their best friends so I don’t see the point but maybe helpful for some.
- If everything checks out, make sure you also feel comfortable with the new tenants. If it doesn’t feel right, don’t do it. You will have to deal with those people on a regular basis; you don’t need the extra stress. It could cost you a lot of money down the road. Better to have one extra month of vacancy. It is a tough decision but it will pay off in the long run.
- Try to schedule a meeting or a quick visit at their house. Use an excuse such as dropping off papers. It will give you a sense of what they may be like once they move in.
- Google them. I always google potential tenants to see if anything weird pops up.
- Have an emergency fund for 3 to 6 months to cover any unexpected vacancy or major repairs. No matter what happens with your tenants, you still have to pay your mortgage, insurance, taxes. Some banks will let you skip your mortgage once a year if needed. It can be helpful.
- Plan your bill payments monthly as much as you can to help with cash flow.
- Property taxes: My city offers a monthly plan where you can pay your property taxes over 10 months, it is really helpful with cash flow.
- Home insurance: Mine is cheap because I only own condos so I pay all at once otherwise I would set up a monthly plan with the insurance.
- Maintenance agreements: Depending where you live, you may have different requirements. The main one for my area is to have heat in the winter. I purchase yearly contracts for the furnace on all units and pay it all at once. The maintenance agreement includes one annual checkup/cleaning of the furnace and 24/7 emergency response. I had to call several times already and had some parts repaired for free. I don’t have to worry about snow removal as it is part of my condo fees.
- Condo fees: It is usually a monthly expense. It includes a lot of the major expenses such as windows, doors, and roof.
- Have a written lease and customize it as needed. When I bought my first rental, I asked my agent to provide me with a sample .Add any specific clause you need, but check to make sure they are legal. I wanted to add that if my tenants brought pets in, I would be allowed to evict them. Well that’s not legal in Ontario and even if my ad says “no pets and no smoking”, if they do either one, there is nothing I can do. I added clauses such as; in case of damage due to pets tenants are responsible to fix, inspection every 3 or 6 months.
- Know the law in your province/state/city. Your tenant will know their rights, make sure you know yours. Most jurisdictions will cover deposits, access to the property, notice required, pet ownership. For Ontario check the Landlord Tenant Board. CMHC is also a good resource.
- If your tenants are behind on their rent, file the legal notice ASAP. In Ontario it is the N4 http://www.sjto.gov.on.ca/ltb/forms/#landlord-forms. Don’t waste any time, the clock is ticking. (unless it is a one-time occurrence and you authorized it first). If you start letting them slide a couple of weeks beyond the first of the month or allow partial payment, before you know it, they will be way behind and you won’t be able to pay your mortgage anymore. My “nightmare” tenant (more on this on a later post) was a pro at this and wouldn’t pay me until I sent her the notice. Not sure when she would have paid if I didn’t filed the papers. She knew the rules better than the Landlord Tenant Board.
- Have a backup person for when you go away. Tenants seem to always call you with an emergency at the worst time. Last year, I was at a conference in Calgary and one of my tenants called me to let me know they found what looked like mold in the basement and they were planning to move out! You don’t have a choice; you have to deal with it right away.
- If you are not a DIY kind of person (I am not), prepare a list of professionals you can call as needed:
- Appliance repair. After a few try, I found a good one who is not too expensive.
- Fix/check furnace. I bought the annual maintenance agreement.
- Handyman (woman). There is always something to fix!
- Inspect the house regularly. I recommend an inspection every 6 months at least. Add a clause in your rental agreement about the inspection and how much notice you will give them (check the law). For each inspection, write an inspection report and have your tenant sign it. Don’t count on them to let you know about all problems but you will find out when you inspect the place. I had a checklist before, now I just send a brief email report and ask them to acknowledge it.
What to expect as a landlord?
- Landlord business is not a 9 to 5 job. Be prepared to get calls any time, day or night. I have been called in the middle of the night because the furnace stopped working. When it’s the middle of winter at – 320 F, you can’t ignore the call.
- Be prepared to handle any situations and wear many hats. Some days you will be a collection agent, others the plumber and sometimes the neighbour’s dispute arbitrator!
- Don’t become too friendly with your tenants. You will find out as soon as something goes wrong that you are not their friend. It doesn’t mean you can’t be a friendly landlord, just maintain some boundaries.
Additional tips that I have found helpful:
- For small property owners, set up a separate rental property bank account to deposit the rent and pay all expenses from. It makes it easier to manage.
- Have your tenants pay you by email transfer. Postdated cheques are outdated.
- Set up your mortgage payments on the 15th of the month, it gives you 15 days to collect the rent in case your tenants are behind. Even the best tenants can have a tough month.
- Increase your rent annually based on the maximum allowed in your province/state. All your other expenses increase too so don’t try to be nice! I am guilty of that one but working on it.
- Let your tenant know you will not respond to any call/text outside of working hours (i.e.: 8 to 5) unless it is a true emergency (no heat). I added a clause in my leases. My tenants were calling me on week-ends and evening about minor things. Also give them a window for response time such as “will respond within 24 to 48 hours” so they don’t expect you to jump every time they call.
- Buy a condo if you are not sure you are ready to take on the full ownership risk. They will usually handle all major expenses. My three rentals are all condos and while the condo fees seems high, it was the best decision for me, and I am learning to take full advantage of the benefits (requested new doors, windows)
- Check the tax laws so you know what expenses you can claim. Keep all your receipts. Some rules may vary depending how many units you have. Get an accountant if you don’t know what you are doing, at least for the first year!
Wow this was a longer post than I expected, I guess I had a lot more to say about the landlord business than I thought. As of today, I am still not sure I am cut-out to be a landlord. Sometimes I want to sell them all , other times I think I should just buy a few more! Either way, it is a great way to accumulate wealth with very little investment and is a great addition to a diversified portfolio, but you need to be ready for the challenge. If it causes too much stress, it is probably not worth it.
How about you, any additional tips on owning rental properties? Are you ready to take the jump if you haven’t already?
Additional resources you may want to check out: