Buying an investment property to earn rental income can be a great way to help with your retirement plan, but it also comes with more risk and responsibility for the landlord than you think.
On top of covering debt payments, don’t underestimate the impact of evictions, vacancies, property repairs and maintenance. Staying in control of your cash flow and rental revenue is the ultimate goal of an investment property.
You’ll need at least 20% for a down payment, though we recommend more. In Canada, you can write off the interest on the mortgage, but not the principle. This limits the benefit, so keeping debt as low as possible will have a bigger impact on your cash flow. Interest rates on investment properties are generally higher than traditional mortgages, and properties with up to 4 units can be insured through the Canada Mortgage and Housing Corporation (CMHC).
A Landlord’s Responsibilities
Being a landlord means not only knowing tenant law, but also how to fix a leaky faucet.
If you purchase an occupied property you aren’t able to adjust rent; freezes and maximum increases are identified in the Residential Tenancies Act, which you should become very familiar with. Anticipate that up to 10% of your rental income will be lost due to vacancies and evictions, and that you'll receive rent when your tenants can pay rather than when it’s due.
Your tenants won’t have the same pride of ownership as you, so don’t count on them to shovel, mow or maintain your property – plan on spending 15% of the rental income on repairs, property maintenance and updates.
If you aren’t handy or just want to be more hands off you should consider hiring a property manager and/or developing relationships with various contractors; both of which will mean more costs to budget for. Either way, being able to cover landlord expenses with a reserve fund or other income will be needed.
The Reality of Owning a Rental Property
Most importantly, be realistic in your expectations. As with any investment, a rental property isn't going to pay off right away and picking the wrong property could end up being a huge mistake. Talk with an Advisor for guidance that’s more specific to your personal situation so you have the confidence to find the right investment property for you.