What You Need to Know About Rental Property Investments

Your Guide on Rental Property Investments

Are you thinking of purchasing a residential rental property to boost your income and improve your investment portfolio? Real estate investing offers many advantages, such as earning passive income, the possibility your investment may increase as real estate values increase, and having a physical asset (unlike the stock market).

However, investing in real estate can be daunting for a first-time investor. Real estate is a tough industry where even the smallest mistake or lapse in judgement can result in poor returns and financial losses. When it comes to your real estate investment, you need to take your time and do your due diligence before making a purchasing decision.

To help you know where to start, what type of landlord insurance you need, and what to watch for, the expert team at Morison Insurance put together this helpful guide. In it, you'll find everything you need to know before investing in a property.

Starting Out

Before you bring a realtor into the picture, it's important that you begin your search for an investment property on your own first. Remember that although a real estate agent is there to help you, they're also there to make money. There is a chance they might try to sell you on a rental property that isn't exactly what you're looking for. Before purchasing such a big investment, it's key you're 100% satisfied with the property. Unlike the stock market, you can't just sell quickly when your investment starts to depreciate. Getting the greatest return on investment means narrowing down the key characteristics you want for your property, having a clear vision, and then enlisting the help of a realtor.

Will You Manage the Property?

Before starting your search, decide whether or not you will be taking care of the property management. Many first-time buyers decide to take care of property management to mitigate costs. However, you can also outsource the responsibility to a property management company. If you're not particularly handy, or you don't want to be at your tenants beck and call 24/7, then a property management company might be for you.

Whether you manage the rental property or hire a company to handle day-to-day operations on your behalf also influences the location of your real estate investments. If you're going to take care of tenant requests, you'll likely need to be near the property. However, if you hire a property manager, then you can own a property anywhere.

Do Your Research

There are numerous sources you can look at to find out information about the neighbourhood you're considering buying in. For instance, the municipal planning department, local police department and mayor's office should be able to give you plenty of information about future development, crime rates and amenities in the community.

However, it's also important to speak directly to the residents-who may well be your future residents. Try to speak to both renters and homeowners to get a balanced sense of what it's like to live in the community and how much property tax is. Visit the community at different times of the day and days of the week to get a true sense of what the local lifestyle is like.

Choosing a Property

When it comes to choosing a property, it can be tempting to go for a fixer-upper. The line of thought usually is that you can flip the home and get a great return on your investment. However, more often than not house flipping winds up being a money pit-especially if you're not planning on handling the renovations yourself.

Instead, it's best to look for a home that will appreciate in time. Try to find a property in a desirable community where, with a few small changes, you can increase its value and attract more affluent tenants. The less money you have to put into the property, the more you will get back once it is rented.

For first-time real estate investors, it's advised that you look for a single-family home. This kind of property tends to attract longer-term renters. Another good option is a condominium, as condos tend to be lower maintenance. Condo boards and associations take care of external repairs, so you only have to worry about managing the interior. Yet, condos tend to garner lower rents and appreciate more slowly than single-family homes.

Top 10 Best Features to Look For

When it comes to looking for your first rental property, there are many other factors to take into consideration, aside from what kind of home you should buy. To get the most out of your rental income as possible, keep the following in mind.

1. The Right Neighbourhood

The neighbourhood in which you buy will go a long way in determining the kind of tenants you attract. For example, a new community full of young families is likely to attract other young families. Conversely, if your property is located by a university, you are more likely to attract students. This could pose a challenge to finding long-term renters. The same logic follows for a vacation rental.

2. Property Taxes

Property taxes will vary widely from neighbourhood to neighbourhood, and you should not only be aware of how much income you'll be losing to property tax, but also how much you could lose in the future as taxes increase. High property taxes are more common in sought-after neighbourhoods, but not always. Watch out for high property taxes in less than desirable communities.

To get a sense of how much property taxes are, you can either talk to other homeowners in the community or visit the municipality's assessment office. You should be able to find all the tax information on file. A good sign that taxes are likely to increase is if the municipality is in serious debt. The less financially stable a community is, the more likely taxes will increase. Also, if an election happens to be around the corner, wait and see who is elected before making a purchasing decision. One mayor may not hike property taxes, whereas another might.

3. Crime Rates

No one wants to live in an unsafe neighbourhood. You should be able to find crime statistics through online resources or in the local news. Failing that, the local police should have accurate crime statistics for the neighbourhood in question. Be sure to look at both serious and petty crimes, particularly theft and vandalism. Look back on statistics from a few years ago to see if crime is on the rise.

4. Proximity to Schools

As we've established, the best kind of investment is a single-family home. And where there are families, there is a need to be near schools. While as a property owner your primary concern will be with cash flow, it's also important to keep in mind how your rental property investment will appreciate with time-particularly if you ever choose to sell. Quality schools nearby will have a big impact on the value of your long-term investment.

5. Amenities

Proximity to amenities is another important factor influencing the long-term value of your rental property investments. As the old realtor adage states, "location, location, location!" Your rental property's location will impact its desirability and your ability to rent quickly. Take a tour of the neighbourhood you're interested in. Take a look at nearby parks, gyms, restaurants, movie theatres, shops, access to public transportation and any other perks that might attract renters.

6. Job Market

Towns and communities with many employment opportunities will attract more tenants. Check out local newspapers for announcements about new companies opening up in the area, and familiarize yourself with the community's local industry. What sorts of incentives are the local government providing for employers? What about local business owners? What is the demographic of the community like? For instance, if you're looking at buying in a suburb, do most people commute to downtown? A vibrant area is much more appealing than one where the local industry is suffering and forcing locals to move elsewhere.

7. Number of Listings and Vacancies

Vacancy rate is a key determining factor in illustrating how much rental income you can expect to collect. Areas with high vacancy rates mean there is less competition. Subsequently, landlords will have to lower rents to attract tenants. Numerous listings could also illustrate that a neighbourhood is in decline.

8. Future Development

Is there a lot of construction going on in the area? Are there plans for future development? These are both signs that a community is experiencing a growth spurt. Yet, not all developments are positive. For instance, additional housing could compete with your property. You should be able to find information about future development through the local municipal planning department.

9. Average Rent

Rental income is why you're getting into rental property investing to begin with, so it's important to know how much you can reasonably expect to charge your tenants. Make sure the average rent in the area is enough to cover mortgage payments, taxes and ongoing maintenance costs.

10. Natural Disasters

Insurance is going to be an important cost as well. If the area is prone to flooding or forest fires, this may increase insurance costs and detract from your rental income.

Determining Your Rent

How do you figure out the right amount of rent to charge? Through avid research and paying attention to real estate market trends. Set the rent too high, and you risk owning an empty unit. Too low, and you don't get a very good return on investment. Establish the average rent in your area, and then go from there. Consider whether or not your property is worth more or less than the average.

You also have to ensure the amount of rent you collect covers all your anticipated costs, plus a surplus. Otherwise, you're not making money through rental income and there is no point to adding real estate to your investment portfolio. Calculate your:

  • Maintenance and operating expenses
  • Monthly payments such as insurance and mortgage payments
  • Property taxes divided by 12 months
  • Additional monthly expenses, such as contributing to an emergency fund

It's far better to overestimate how much operating expenses will be than to underestimate. Consider how old the property is. A newer build will likely need less work over time compared to an older home.

Also think about the type of tenants you're attracting. Student homes can be prone to damage, whereas an older couple will likely take better care of the property.

Making the Purchase

When purchasing rental property investments, it's important to note that a bank or mortgage lender often has tougher lending requirements for an investment property than a primary residence. The assumption is that during tough times, homeowners are more likely to protect their residence than an investment property. Thus, you should be prepared to put down a 20% to 30% down payment, as well as closing costs. Ensure you have the property thoroughly inspected, and that a real estate lawyer reviews everything before you sign.

Finding the Best Insurance

Don't forget, having comprehensive insurance that protects your valuable investment is quintessential. Not only should your tenants be required to have renter's insurance, but you should also be adequately covered with homeowners and landlord insurance.

To help you find the best insurance policy for your needs, the team at Morison Insurance is here to help. As a family business locally owned and operated here in Ontario, we always make our client's satisfaction our top priority by offering excellent customer service and ensuring we provide the best coverage possible.

Are you ready to learn more about what the team at Morison can do for you? If so, we invite you to give us a call at 1-800-463-8074. Or, you can get an insurance quote today by submitting our online form.

This content is written by our Morison Insurance team. All information posted is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information in this article, you do so at your own risk. While the information on this website has been verified to the best of our abilities, we cannot guarantee that there are no mistakes or errors.

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