A few weeks ago, I posted an article on my blog titled “The Hype Around the BRRR Method for Real Estate Investing”. Since then, several people have reached out asking questions about buying a second home and wondering how to finance it. Having worked in the real estate industry for 15 years and being a landlord myself, I think I can provide some valuable insight for someone who wants to get started.
Here are 10 things that you should know!
1. Make sure you have 6 months worth of mortgage payments in the bank as a back up plan. You may have renovations you want to do when you buy an investment property, you may also have a challenging time renting it out, or you could have an uncooperative tenant that isn’t paying their rent. The landlord tenant board is backed up by at least six months right now, so it's important for you to have a safety net in place to minimize your risk.
2. Don’t use your own money! Especially right now with rates so low! Borrow money for down payment via refinancing your current home or secure a HELOC against your home from your lender. HOWEVER: Be very careful about overextending yourself! The last thing you want is a struggle to make future purchases because of having too many open credit lines.
3. Make a budget. Building materials have increased by at least 40% since the pandemic started. If you need to renovate, be sure to factor that into your budget. You’ll want to put aside an extra 20% of current material prices so you’ll have a cushion if prices do continue to increase before you have all of your supplies secured. (Look at the price of lumber right now.. insane 🤯!)
4. Don't forget, in the City of London, all rental properties need to be licensed. The city requires an ESA and fire inspection certificate before a rental license can be approved. There are fines for landlords who own rental properties without licenses.
5. Ensure you have a few hours a month to be available to your tenants if you plan to self-manage your property. There will always be small things that need doing, collecting rent, making repairs, calling around for tradespeople, etc
6. Property managers generally cost approximately one month's rent for tenant screening and placement, and another 5-10% of monthly rent for full management services. Budget for this by building these costs into the rent you’re charging your tenants.
7. Make sure to learn the Residential Tenancies Act front to back so you know your rights as a Landlord. The act favours tenants' rights, so it’s important to know what your rights are if you ever have to deal with any tenant-related issues.
8. Landlord and tenant relationships are also subject to the Human Rights Act, so it’s a good idea to understand what the act entails.
9. If a dwelling has more than 4 units, it’s considered a commercial property, so be prepared to pay HST on top of the purchase price. You will also be required to have a substantially larger down payment than the regular 20% you’d usually expect when buying a residential property.
10. Be sure to keep your rental properties as leveraged as possible if you want to keep investing. You may be asking why?? I know it sounds crazy but when you look at the after-tax numbers, it makes sense. (Only the interest portion of your monthly mortgage payment can be written off.)
As always, if you have any questions about real estate investing, or about anything else real estate related, I’m just a phone call away!
