A rental property can be a great investment, but it’s a big commitment and the rules associated with being a landlord can be complex. These five steps will help you prepare.
Step 1: See how much you can afford
The price for a multi-unit or single-family property may be high, but rental properties have rental income to help offset your costs. This rental income, along with the amount of your down payment and your other income will help determine how much you can afford.
Keep in mind that to qualify for a rental property mortgage, you need at least 20% for a down payment. When thinking about how much you want to spend on a rental property, make sure you also consider closing costs and other one-time costs.
Step 2: Plan your budget
Are you financially ready to buy a rental property? The numbers have to make sense when investing in real estate. Beyond the upfront costs, you’ll have to pay the monthly expenses that come with owning any property, such as property insurance, property taxes and upkeep. You’ll also need to budget for ongoing expenses associated specifically with being a landlord, such as repairs for damage from tenants and mortgage payments in case of vacancy.
Step 3: Get a mortgage pre-approval
Getting pre-approved for a mortgage means you can make an offer on a property with the confidence that you’ll be able to access the money you need to complete the purchase. Your pre-approval will also tell you how much your estimated mortgage payments will be and lock in your interest rate for a certain period of time.
When getting a pre-approval, lenders will need information about you and the property you plan to buy. Property information may include the approximate purchase price (you’ll know from the affordability calculator in step one) and rental income.
Step 4: Search for a property and make an offer
Location, location, location – but there are other factors too. Here are some things to think about when searching for a rental property:
Do you want it to be close to home? If you need to regularly visit the property, it will be easier to manage if it’s nearby.
Are there already tenants living on the property? Ideally the answer is yes because a rental property with existing tenants provides immediate income.
Will the property be easy to rent? Investing in a property that’s in a neighbourhood with high demand for renters can help minimize long vacancy periods.
Does the property need repairs? If you need to hire professionals to take care of immediate repairs, take the cost into consideration.
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