3 questions to ask before you become a landlord

Think cash-flow and hard work when you consider investing in rental properties

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Owning a rental property can be profitable—but it comes with risk. As a landlord, you can get dodgy tenants, catastrophic home repairs can quickly eat up your contingency budget and day-to-day problems, such as mice in the house, can eat up evenings and weekends. So, before you crunch your numbers and take that first step to becoming a landlord, ask yourself these three questions:

1) Do you want a second job?

While a realistic financial budget is vital to the profitability of a rental property, so is factoring in the time and energy that’s required to running a smooth investment property.  For instance, will you have the time (or money) to pay for a flood clean-up? Do you have the patience to follow-up on a tenant’s complaint regarding rodents or bugs? Have you factored in who will go to the rental property to change the smoke alarm batteries, clean out the drains and gutters and change the furnace filters (among other tasks)? And what’s your emergency-preparedness plan should an unexpected repair occur?

It’s like having a second job, explains Michael Currie, owner of the Fort Nova Group, a real estate investment and education company based out of Nova Scotia. As an experienced landlord and real estate investor, Currie says: “There’s work to be done as a real estate investor and your cash flow can quickly be eaten up because of a bad tenant or an emergency repair.” Currie advises new landlords to invest in a good maintenance and emergency plan—one that includes knowing where the money will come from to pay for repairs, as well as who is responsible for making sure the work gets done.

2) Do you want to be an active investor?

A real estate investment is not a passive investment. “For a relatively small amount down, you get ownership of a big asset,” says Currie, “but the return on that investment is not passive.”

To keep a property cash-flow positive, you need to:

→ find a good tenant

→ keep that good tenant (address tenant issues)

→ update the property (maintain the property and remodel/update when needed)

→ address emergency or unexpected issues as they come up

“I have to work for my return,” says Currie. And that work doesn’t stop at your rental unit’s door.

You’ll need to report all income to the Canada Revenue Agency. The good news is you can offset this taxable income with the expenses incurred from maintaining and repairing the unit. Keep track of utility bills, maintenance costs, repair bills, home insurance, property tax, and even mortgage interest—all these expenses can be used to reduce the taxable income earned from your rental property. But keep your receipts, as any expense you use to reduce your taxable income needs to be backed up with a receipt or invoice.

3) Can you get a better return with a different investment?

The last question you should ask yourself is whether or not you can invest your money elsewhere and achieve the same, or even better, results.

To answer this question honestly, you’ll need to factor in the time-commitment of being a landlord, as well as the potential future returns (based on past performance). But don’t forget to take into consideration the power of leverage.

“If I went into a bank and asked to put $10,000 down on $100,000 worth of stock, they’d show me the door,” says Currie. “But with real estate investments, I can leverage my $10,000 to own a $100,000 property—making it a great, long-term, active investment.”

 

If you answer all three of these questions honestly and accurately and still think a real estate investment is the best bet for your money, then it’s time to start educating yourself. Because the more you know about being a landlord and investing in property, the better chance you have of building a successful real estate portfolio.
Read more from Romana King at Home Owner on Facebook »

5 comments on “3 questions to ask before you become a landlord

  1. You have to pay for the repairs, property tax, tax on rental income, interest on the loan and invest your time in keeping the tenant happy. If you want to sell the home, you need to pay for the capital gains tax, 6-7% as the real estate commission and other costs.

    Is it really worth, considering the appreciation of the value of the home by 3-5% per year in medium size cities? Does the power of leverage neutralises the costs?

    Reply

  2. It all depends what your income outside of the rental is and what your margins are on the house. If you’re barely making any profit then it’s probably not going to be worth it unless you get very lucky and have no repairs for a few years. Also a big question is, “Are you handy”? If you can fix, repair and reno most of the house yourself you will save thousands.

    Reply

  3. Great article and tips from an investment point of view. From a psychological perspective, being a landlord also means taking on a full-time caring role to your properties and tenants, so all of a sudden, you have a million things to worry about. Hence, before jumping into it, you really need to take stress into consideration and ask yourself if you handle stress well, and if you’re willing to invest your mental space.

    Reply

  4. I admit now that I am. I have been getting rid of stuff over the years, but truly I can admit after reading Josha Baker s blog about becoming a minimalist has given me more energy and relief to get rid of items that clog up your space around you. I still shop but not as much as I used too.

    Reply

  5. if, you are retired make sure it is paid off. That way you have cushion for repairs and there is apositive cash flow. I bought a rental property for 116,000 rent is 975 minus 8% for management fees . Better then the stock market.

    Reply

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