I was determined to own property, in some form. Sadly, I couldn't afford anything in my home city of Toronto, so I decided to buy a property in a neighbouring city and rent it out until, or if, I was ready to move.
After looking at several possibilities, I decided to buy in Hamilton because of transit options, affordable housing prices and a low vacancy rate.
I found a cute bungalow divided in two units. After all the paperwork went through, I found great tenants.
It's now one year later, and I've learned a lot. Here are five lessons I learned:
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Plan for Extra Costs
I needed way more money than I thought in order to buy and manage a rental property. The closing costs alone were thousands of dollars in cash. In Ontario, closing costs include land transfer tax, legal fees, a home inspection, pre-paid property tax and PST on Canada Mortgage and Housing Corporation insurance — if you put less than 20 per cent down. My closing costs totalled $6,000.
In the first year, I spent $2,700 on maintenance, and that's for a small, fully-renovated house. Just recently, a windstorm knocked shingles off my roof. Totally unexpected and $500 to fix.
Budget for all anticipated expenses, and then add a few thousand dollars to be safe.
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Figure Out the Rent
How do you know if you have enough money to be a landlord? Easy: use a spreadsheet. You need to know exactly how much your house costs to run so that you can charge sufficient rent.
And how embarrassing would it be if you forgot whether a tenant paid you first and last months' rent? Think of an investment property like a business, and keep your books accordingly.
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Don't Forget Tax Time
I was shocked when I had to pay $1,500 this April to the Canada Revenue Agency (CRA). The CRA taxes rental income at your marginal tax rate. I now have an automated monthly savings set up to set aside tax money and avoid last-minute scrambling.
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Check Your Tenant's Credit Worthiness
What you need as a landlord is a tenant who pays their rent promptly each month. A credit score can tell you if a person has a history of paying their lenders on time. Ask for a credit report and employment letter to confirm that your tenant can pay their rent each month.
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To Include Utilities or Not?
I decided to include utilities. I have two units but one meter, and I couldn't figure out a way for each tenant to split it fairly without hassle. So I called the utility companies, asked them for the monthly average of the previous year, added 30 per cent, and included it in the rent.
You can also let the tenants pay utilities themselves. Because electric and gas are so expensive in Ontario, you don't want to be on the hook unless you have to be. It's a lot easier for tenants to leave the lights on when someone else is footing the bill.
A Learning Experience
I learned that owning an investment property is much like having a child. Make sure you can comfortably afford it before you start trying, and if it's exhausting you, consider hiring a nanny—that is, a property management company.
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