Buying a residential rental property can be a good investment, as the property increases in value over time and brings in a monthly cash flow from rent. But, before you can reap the benefits of an investment property, here are three tips you should consider to help you during the process.
Save Your Down Payment
Before you begin shopping for a rental property, make sure you have enough cash set aside to put toward as the down payment. Canada's new mortgage rules require you to put down at least 20 percent of the purchase price on a rental property with one to four units. This means that to buy a rental property that costs $300,000, for example, you need to have access to $60,000 as a down payment when you close on the purchase of the home.
One of the benefits of putting a large down payment on your rental property purchase is your mortgage payment will be lower, so you will have lower financing costs each month. This will help improve your monthly cash flow on the property after you pay for the property-related expenses. And, when you finance less than 80 percent, you won't be required to pay a mortgage insurance premium on the loan payment each month. A mortgage insurance premium can increase your payment amount by nearly four percent of the total mortgaged amount, in some situations.
Use a Real Estate Agent's Services
To help you during your income property buying process, it is helpful to seek out the services of an experienced and qualified real estate agent. As a buyer, you can get the services of a real estate agent for free, as their fee is typically paid for by the seller of each property for sale. It is smart to use a real estate agent, especially if this is your first real estate purchase experience, as your real estate agent will help you fill out the contracts and purchase offer. They will also be familiar with legal requirements and the negotiation process.
A real estate agent can potentially bring a wealth of knowledge to the income property buying process. Not all real estate agents are landlords and rental property owners, so do a little bit of searching before you decide to hire a specific agent. But be sure to look for a real estate agent who owns rental properties, so they can help you in searching for a good potential rental property. Your real estate agent can help you find properties in neighborhoods that allow rental homes, and help you determine rental rates in neighborhoods you are shopping for a property in.
Hire a Property Management Company
Once you have purchased your rental property, you may want to hire the services of a property management company. The property management company will handle such things as screening and searching for new tenants, showing the property, collecting rent, handling the eviction process, and can generally handle all contact with your tenants and send you any income from the property. This can save you the hassle of taking late-night phone calls from your tenants when, for example, they are reporting a plumbing problem in your rental property.
If you are considering hiring a property management company, expect to pay for the cost of the management from the income of the property. One property management company in Toronto reports charging monthly management fees from seven to eleven percent of your gross rent rate each month. Then, when your property becomes vacant, you may need to pay a fee to locate a qualified, new tenant, which can be equal to one-half the monthly rent. Additionally, you can expect to pay, for example, for plumbing and electrical repairs, cleaning the unit when your tenant moves out, and handling pest control.
Consider these three items when you are planning to buy a rental investment property.Share