Income Properties Are Trending, But Is Landlord Life for You?
If the thought of investing your money into brick and mortar—or perhaps some stylishly-painted siding—excites you, join the club.
Investing in real estate has long been one of Canadians’ favourite ways to grow their wealth. According to a poll by CIBC, 15% of Canadian homeowners already earn some rental income, while another 11% aspire to it. What’s more, over a third of current homeowners (37%) say they’d look for a property with income potential if they were buying a new home.1
Baby boomers over the age of 55 are especially likely to own an income property these days.2 But according to Statistics Canada, a growing share of millennials in their 30s and 40s have also cashed in on the real estate investment trend.3 The Bank of Canada estimates that at least 20% of newly purchased homes are now owned by individual investors, up from 18% in 2015.4
Canadians have historically embraced real estate, in part, because of the strong return on investment it can offer—especially to investors willing to stick with a property over time. It’s also a popular way to hedge against inflation since both rental income and property values tend to rise in tandem with overall prices.5
But how do you know if you’re well-suited to take advantage of real estate investment opportunities? Here are three signs that owning a rental property could be right for you.
1. YOU’RE A HOMEBUYER WHO WANTS HELP COVERING THE MORTGAGE
If you’re looking for a creative way to buy a home without overspending, “house hacking” could be the answer. Increasingly popular with first-time homebuyers and budget-conscious investors, house hacking simply means buying a home that you intend to live in while renting out a portion of it to one or more tenants.6
In addition to padding your monthly income, buying a home with a self-contained income suite can make it easier for you to qualify for a mortgage. If a secondary dwelling is move-in ready, a lender may be willing to add half of the rental payments you can plausibly collect from future tenants to your qualifying income, making it easier to pass the mortgage stress test.7
House hacking also tends to be simpler to break into than traditional real estate investing since you don’t need as large a down payment to qualify for a mortgage. For example, if you buy a home you only intend to rent, you’ll need to put down at least 20%, regardless of whether or not your mortgage is insured. But if you intend to move into the property yourself and only rent out a part of it, you can put down as little as 5%.7 Plus, your mortgage rate will be lower and you may still qualify for a principal residence exemption for some or all of the home if you later sell it.7 8
When it’s time to start your search, we can help you find a property that’s ideal for house hacking, such as a house with a walkout basement, a multifamily unit, or a home with enough outdoor space to build a laneway or garden suite.
2. YOU’RE AN INVESTOR LOOKING FOR STEADY AND RELIABLE INCOME
If you’re not crazy about the idea of a live-in tenant but still desire an additional stream of income, a dedicated long-term rental property could be a better option for you. Besides the monthly proceeds, purchasing a rental home can also add diversity and long-term stability to your investment portfolio and help you build wealth over time.9
According to data from the Canadian Real Estate Association, real estate owners have historically prospered. In early 2020, for example, the average home price was 120% higher than just 15 years prior. Then, during the pandemic-era real estate boom, average home prices grew at an especially frenzied clip, climbing by more than 60% in less than two years.10
However, the rate of appreciation can be hard to predict, so it’s prudent to invest in a property that also offers positive cash flow, which means the rent you take in exceeds your expenses. This strategy helps to ensure that you’ll put money in your pocket each month, even if the property’s value takes time to grow.
While today’s higher mortgage rates can make it more challenging for landlords to turn a profit, a tighter rental market also means you can demand higher rents. Turnover on your rental unit may also be lower as many would-be buyers remain priced out of the purchase market.9
Plus, research by Statistics Canada suggests that many landlords now earn significantly more than they once did. In 2020, for example, more than 76 percent of independent landlords reported earning more rental income that year than they spent on upkeep, taxes, mortgage payments, and other annual expenses. That’s up from 63 percent in 2008.3
If you want to explore opportunities for a residential rental property that’s good for your wallet and attractive to renters, we can help.
3. YOU’RE AN EXPERIENCED INVESTOR LOOKING TO MAXIMIZE YOUR POTENTIAL RETURNS
Another increasingly popular way to draw income from an investment property is to convert it to a short-term vacation rental. But beware: This strategy can be riskier as some municipalities have tightened rental restrictions and others are suffering from market oversaturation.11
With that said, if you’re an experienced investor who can afford to take on some uncertainty, then investing in a short-term rental could make sense for you.
If you find the right property, for example, you could earn significantly more renting it short-term on a platform like Airbnb than if you rented the home to a long-term tenant.12
The key is to keep it occupied as much as possible at a premium nightly rate. To do that, you’ll need some marketing savvy, hospitality skills, and business acumen. Of course, you can always hire a professional property manager, but you’ll need to factor the cost into your budget.
Vacation rentals have boomed in recent years, and some inexperienced investors are finding they bit off more than they can chew.13 As a result, there’s an opportunity to snap up some of these properties, but you’ll need some cash on hand and a willingness to learn the business.
We can help you scout opportunities in our local market or, if you’re interested in investing in another area, we can refer you to an agent there for assistance.
BOTTOMLINE
Investing in real estate can be a great way to build your wealth long-term and earn some extra income. But to make the most of your investment, it pays to be strategic.
Call us for a consultation so we can discuss your goals and budget. We’ll help you discover neighbourhoods with the best income potential, point out the homes most suited to renting, and help you brainstorm the best investment strategy for you.
| Before you take the plunge, make sure you can answer “YES” to these three questions: 1. Are you ready to be a landlord? Owning a rental property can take a lot of time and energy. You’re not just buying passive income, you’re also building sweat equity since the time you spend maintaining, marketing, and managing your rental can add up quickly. So be prepared to do some soul-searching to ensure you’ll not only flourish as a landlord, but actually enjoy it. If you want to invest in real estate but aren’t prepared to put in the day-to-day effort required, we can refer you to a property management service for help.
2. Can you afford to invest in real estate? The last thing you want is to get over-extended with your new real estate venture. Besides the cost of purchasing the property, you’ll need to consider additional expenses, like property taxes, insurance, administrative costs, and maintenance and repairs. You will also need a cash reserve for unexpected issues or potential vacancies. We can help you run the numbers to determine if you can charge enough rent to offset your expenditures.
3. Have you found the right income property? Even if you’ve got your finances in order and are emotionally ready to invest, your success as a landlord will also depend on the property you buy. The criteria for a good rental home and a good family home are often different, so it’s important to lean on professionals for advice. We can help you find an ideal rental property, taking into account your budget, risk appetite, and investment goals. If you decide to invest in a different area, we’ll connect you with an agent who’s more plugged into that community. Reach out today to schedule a free consultation. |
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
- CIBC –
https://www.cibc.com/content/dam/personal_banking/advice_centre/tax-savings/landlords-en.pdf - Statistics Canada –
https://www150.statcan.gc.ca/n1/pub/46-28-0001/2023001/article/00002-eng.htm - Statistics Canada –
https://www150.statcan.gc.ca/n1/daily-quotidien/221102/dq221102b-eng.htm - Bank of Canada –
https://www.bankofcanada.ca/2022/01/staff-analytical-note-2022-1/#chart4 - Canadian Real Estate Magazine –
https://www.canadianrealestatemagazine.ca/news/the-relationship-between-inflation-and-real-estate-335369.aspx - HGTV.ca –
https://www.hgtv.ca/expert-tips-that-will-help-you-become-a-homeowner-before-40/ - Wowa.ca –
https://wowa.ca/rental-property-mortgage - CTV News –
https://www.ctvnews.ca/business/selling-a-home-how-to-know-if-you-qualify-for-a-capital-gains-exemption-1.6249394 - MPA Magazine –
https://www.mpamag.com/ca/mortgage-industry/guides/real-estate-investing-in-canada-where-to-put-your-money/447803 - Canada Real Estate Association (CREA) –
https://stats.crea.ca/en-CA/ - The Canadian Press –
https://ca.finance.yahoo.com/news/more-canadians-turn-short-term-151015862.html - TurboTax Canada –
https://turbotax.intuit.ca/tips/the-ultimate-guide-to-the-tax-implications-of-renting-your-property-on-airbnb-14945 - Statistics Canada –
https://www150.statcan.gc.ca/n1/pub/11-621-m/11-621-m2023008-eng.htm
