By Mark Weisleder
Many people think being a landlord and investing in real estate is a way to make easy money. It can be financially rewarding if you do your homework and reduce your risks. But easy, it isn't and it can lead to financial ruin if not done properly.
Moneyville columnist Alison Griffiths wrote about her adventure as a landlord earlier this year. It's a humorous look at what can go wrong and the lessons learned, but anybody thinking about an investment property might want to read: Why did I think being a landlord was easy money?
The trick is to end up with money in your pocket at the end of the month after paying your bills and collecting the rent as you slowly pay down the mortgage and end up with a nest egg.
Here are some tips:
- Research the area where you'd like to buy. Is it in decline or on the way up? A good indication is if chains like Wal-Mart, Tim Hortons and Home Depot are moving in. These companies do a lot of work on demographics and income before deciding where to locate. You can get a big picture look at vacancy rates at settlement.org, a federally funded site that helps immigrants with information and resources to settle in Canada.
- Use a real estate agent who also is an area investor. Ask them to show you their properties and the rents. Ask for the names of other investors they have helped. Call them. Make sure they have a team of professionals you can use, such as property managers, insurance advisers, mortgage brokers, home inspectors, accountants and lawyers.
- Once you own more than four rental units, find a reliable property manager. You don't want to take a call in the middle of the night. A rule of thumb is that you should allocate up to 10 per cent of monthly rent to a property manager. They will make sure your building is properly maintained and can help find tenants.
- Do not be in a hurry to rent a vacant unit. Take your time to qualify any potential tenant, since it can take months to evict a problem tenant. Call all tenant references, ask for a current pay stub and speak to at least two prior landlords. Where possible, require the tenant to pay for utilities. The tenant will have to apply to the utility company for an account, which amounts to an extra credit check being done by the utility company.
- Be careful with basement apartments and homes rented to students. Although these units can provide additional income, you must make sure that they are legal, comply with the fire code and have any required licenses to operate.
- Buy and hold your property for the long term. This way, you have an income and slowly start to pay down your mortgage.
- If you are investing with others, have a partnership agreement. Problems may occur later if the friendship breaks down, especially if one partner loses their job and cannot pay their share of expenses, or if one partner wants to sell while the other does not. With a partnership agreement, you can provide what will happen in these situations in advance, without having to pay costly legal fees to figure it out later.
Investing in real estate is not easy. But by taking the proper precautions, it can be very rewarding.
Mark Weisleder is a lawyer, author and speaker to the real estate industry. Contact him at email@example.com