With interest rates on the rise and given the current economic climate, not everyone is rushing to invest in a rental property just yet.
But that doesn’t mean there aren’t great investment opportunities in this market or that the right opportunity isn’t just around the corner. So, it’s best to be prepared and have a clear idea of what you’re looking for—and what to avoid.
For anyone planning to purchase a rental unit to generate income, the following are some tips to keep in mind during the planning stages.
Buying a rental property
- Location: As with all real estate, location is crucial. Is the property in a desirable area that will make it easy to rent out? Is it in a stable rental environment with a low vacancy rate?
- Rules and restrictions: It’s important to know your jurisdiction’s rules and bylaws for renting, as well as your legal obligations as a landlord. Do you plan to use the property as a long-term rental or short-term unit (i.e., Airbnb)? If it’s the latter, ensure short-term rental use is permitted. You should also be familiar with the rules and regulations surrounding evictions, taxes, renovations and rent increases.
- Type of property: Are you looking to purchase a pre-construction unit or re-sale? Keep in mind the pros and cons in both cases. If it’s your first foray into rental unit ownership, you may also want to stay clear of fixer-uppers unless you have a professional background in renovations.
- Do you have the time or experience to manage a rental property? If not, you may want to consider working with a property management company. They can take care of tasks like collecting rent, addressing maintenance concerns and marketing your unit, but they also take a cut of your rental income.
Securing financing for a rental unit can be quite different compared to financing for owner-occupied properties.
- Qualification: To qualify for a mortgage on an investment property, you’ll need good credit history, be able to prove enough non-rental income to meet the obligations of the mortgage, and demonstrate sufficient rental income (either through existing tenancy or based on market rental data) to cover the principal, interest, strata fees and taxes, and ensure a bit of a buffer based on the lender’s qualification rules.
- Number of units: This will impact the type of mortgage you can obtain. For example, a property with five or more units will be considered commercial zoning and be harder to qualify for financing.
- Short-term rentals: Condo hotels in resort communities, Airbnb and other short-term rental arrangements are incredibly desirable because of their income potential, but they can also pose financing challenges. Lenders are particularly sensitive to zoning that will allow for short-term rentals or anything that looks and feel like a hotel. Also, while short-term rentals can sometimes be more lucrative, many lenders will not recognize that type of rental income.
- Down payment: Since this is a rental property, you will need to put down a minimum of 20% of the purchase price.
Give me a call
If you are currently or plan to be in the market for a rental property, there are still plenty of options available. Give me a call today and I’ll be happy to review them with you.
Steve Tallo(289) 314-8786
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