Blurb: Rental property can be a great investment, but be prepared, because there are lots of potential pitfalls. Before committing yourself, it pays to do some basic research.

 

August 17th, 2004

By Peter Diekmeyer o Bankrate.com

Thinking of buying rental property?

With low interest rates and spiking real estate prices, rental property owners have done exceedingly well during the past five years. And many potential buyers are hoping to get on the gravy train

Although results vary, rental property prices are at historic highs in many major Canadian markets. For example Montreal "plex" buildings, (between two and five rental units) have risen an average of 68.1% during the past five years according to the Greater Montreal Real Estate Board. But despite the allure of quick money, experts caution that there is big difference between buying a house or condominium and buying property as an investment.

"When you buy rental property, you are getting into business for yourself. It's not like buying residential real estate," says Vince Brescia, president of the Ontario Federation of Rental Housing Providers. "Your decisions should be made on a cold dollars and cents basis."

To help potential rental property buyers, we've compiled a list of things to do, for those who are thinking about becoming a landlord.

(1) Learn the business. One ironclad rule for potential business buyers is that you should work in the industry for at least two years first. There are many more potential pitfalls in the rental property business than you cannot learn from simply reading.

Working part-time for a friend or relative who owns a building before investing in you own, would dramatically increase your chances of succeeding. If that isn't an option, talking to other building owners in the neighborhood where you are thinking of buying would be a good start.

(2) Start small. Don't put all your eggs in one basket. Start by buying a one or two unit rental property, so you can make your mistakes when there isn't too much at stake. There's a lot to learn about negotiating with tenants and contractors, doing minor repairs and handling the tax and regulatory paperwork.

Starting small will also hopefully provide you with a cushion to protect you against unexpected expenses. Many analysts think that interest rates, --which are often property-owners biggest cash expense - are set to rise. It's best to be prepared.

(3) Check the valuation metrics used in different markets. Buying rental property is similar to buying residential property in many ways, except the stakes can be much higher. For smaller units, particularly the plex market, valuation tends to be done by comparing the unit to be sold, with the selling price of similar units in the area that have changed hands recently. Larger properties tend to trade at a multiple of gross rental revenues.

(4) Don't pay too much. A big part of making money in real estate lies in getting in at the right price. So make sure that you don't pay too much. The trick of course is knowing what "too much" is. But shopping around and avoiding areas that have seen big run-ups in recent years are a good start. It's also best to talk to several real estate agents that specialize in the market that you want to invest in, to make sure that the property that you want to buy has been correctly priced. And don't forget to get your property inspected.

(5) Get a good lawyer and accountant. The rental industry is highly regulated. The paperwork aspects of being a property owner are just as important as the business aspects. A good lawyer and accountant may be pricey, but they are usually worth it. Ask other property owners to recommend professionals who have real estate experience.

(6) Contact a property owners' association. Most Canadian provinces have an association geared to lobbying and providing support to rental property owners. Rental laws differ from province to province, especially in the area of rent control. Don't forget that Quebec is based on civil as opposed to common law.

These associations (such as the Ontario Federation of Rental Housing Providers) often have good information on their Web-sites that will give potential buyers with a good idea of some of the challenges that they are getting into.

(7) Familiarize yourself with the tax implications. If you buy a rental property, you'll have to produce a set of financial statements for tax purposes outlining your revenues and expenses. It pays to do some research beforehand or by reading some articles on the subject. (Provide link to bankrate.ca's article "The tax consequences of real-estate ownership").

(8) Arrange financing first. According to Danielle Turbide, a mortgage broker with Multi-Prêts Hypothèques, the Canadian banking industry regards buildings with between one and six rental units as residential real-estate. They are thus eligible to be financed at the promotional posted mortgage rates.

Buildings with more than seven rental units are considered to be commercial properties and are evaluated using much tougher criteria. Interest is charged based on the bank's assessment of the risk that is inherent in the deal.

(9) Check out the tenants before you buy the property. For most small rental property owners, choosing their tenants is going to be the most important decision that they make. According to most industry professionals, rental laws are stacked in favor of the tenants, and it can be hard and sometimes impossible to expel bad ones. According to Brescia, it is far better to take a good tenant who pays you a little less in rent, rather than take you chances with a suspect tenant, just because he is a little looser with his cash.

(10) Get ready to get your hands dirty. Landlords who have a bit of the handyman in them, or who like to do minor renovations and repairs themselves will have a big leg up in the rental property business. Building owners often say that the work they put into the property is the difference between making a profit or loss.

 

Peter Diekmeyer is the Montreal Gazette's management columnist. He can be reached at: peter@peterdiekmeyer.com

 

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