5 Things To Consider Before Buying a Rental Property

Thinking of buying an investment property? 5 Things to consider before becoming a landlord and buying a rental property in Ontario.

Financial Qualification

Before deciding where and what to buy, it is good to find out what you qualify for in terms of mortgage financing. For example, if you qualify for $500k purchase, your options are limited in the city of Toronto, however if it is $1.5 million, investment properties such as duplexes would be an option.

Location Location Location

Yes location matters. Look at who you want your target tenant profile is. Is it a recent university grad in their first job, university student, young family, urbanites vs suburbanites, etc….Buying an investment property is buying a business. Let me say that again: buying an investment property is buying a business. You need to know who your customers are, their profile, what they are willing to pay, etc…

Factors to consider when narrowing down the location options are: infrastructure in the area such as transportation, growth, transportation and community.

Taxes

Yes there are tax implications to consider when you buy an investment property. Three taxes to account for:

  1. Land transfer tax when you buy a rental property. If you buy a rental property in Toronto, you will have to pay 2 land transfer taxes: one to the city and one to the province

  2. Income tax since rental income is added to your income and taxed at your taxable income rate

  3. Capital gains tax when you sell the investment property. Capital gains is the difference between the selling price less purchase price less expenses incurred in buying and selling such as real estate fees, land transfer taxes & legal fees. Disclaimer: talk to your accountant regarding rental property taxes and how it would impact your personal finances


How To Make Money When You Buy An Investment Property

There are 4 ways to be profitable when you buy a rental property:

  1. Building equity: over time with mortgage paydown and rental property appreciation, you will build equity

  2. Rental income: Depending on how much downpayment you put in you could have a monthly rental surplus 

  3. Tax benefits: an investment property is a business and it provided tax benefits for the real estate investor. Discuss with your accountant a tax strategy that best suits your situation. Some real estate investors utilize capital cost allowance also known as depreciation on annual basis vs other real estate investor who do not

  4. Adding value: A good example is converting a single family home into a duplex. The real estate investor would generate 2 vs 1 income. Other examples are doing an addition to the house or gutting the property to a higher quality finish

Time

I’ve always looked at buying a rental property like planting a tree. It takes time and work to for the tree to grow. It takes time for the rental property to appreciate, mortgage paid down and work managing the property to reap the rewards. This is why tenant profile is important. Buying an investment property in an area where you can attract triple A tenants will make it easier to manage the rental property and you, as a real estate investor, would tend to hold on to it longer. Time is on your side to build wealth. With time you will have options to pull equity and buy another investment property or strictly focus on paying the rental property off.

Here is an example: Buying a million dollar investment property today with 4% annual appreciation, in 25 years, the property would be worth $2.65 million. What would $2.65 million do to your retirement planning?

Looking to buy an investment property, download my investment property calculator and I will send you the investment calculator along with my real estate investor guide.

Till next time……happy investing.