With all of the home renovation shows on TV, it’s no wonder that so many Canadian homeowners are considering a rental unit to help pay the mortgage. But when is the right time? And is becoming a landlord right for you?
According to this article in Learnvest, most people wait until later in life before considering investment properties. And most, but not all, approach life in this order:
Life is made up of rules that are meant to be broken, though, and who says you can’t invest before you have kids? Or buy your own house? At the end of the day, you should do what works best for you.
First of all, unless you’re really good at screening prospective tenants, you never know what you’re getting. Depending on whether or not you’re a live-in landlord, this could be a good or bad thing. You could end up with a tenant who’s messy on disrespectful, noisy or destructive. On the other hand, you could end up with someone who perfectly fits what you’re looking for, although, if you ask any landlord, this is rarely the case.
If you do end up with a nightmare tenant, the eviction process is not easy. There are also the ongoing costs to think about – repairs, the cost of utilities (if sharing the bill), plus the cost of replacing those appliances if they stop working. Finally, assuming your home doesn’t already have a rental unit contained within, you'll need to budget for the build itself. It will take quite some time – years, maybe – before you start reaping the financial rewards of your investment. Don’t forget property taxes and the fact that the money you receive from your tenant(s) is consider taxable income.
And that brings me to the positive aspects of being a landlord. The big pro is fairly obvious: money. Your tenants bring in a steady, and sometimes hefty, income. If you live in an area where rental units are in high demand, you should have no trouble keeping your rental unit occupied. I know some folks who have their monthly mortgage payment down to nothing simply because they have a rental unit. In their mid-thirties, this couple is fairly financially free and can afford more luxuries than most people their age.
If you choose to approach life like most people (see the order of operations above), then you’ll be looking at buying an investment property after you have kids and buy your own home. This means taking out a second mortgage.
A Globe and Mail article from earlier this year discusses how the financing game has changed when it comes to buying a rental property. First of all, lenders now expect you to put down a lot more than 5% – usually one-fifth of the purchase price – and you won’t always get the best rate. Considering that the average Canadian home costs $360,000, that means you would be required to put down a whopping $72,000. Ouch! And because the housing market and the economy has been tipsy at best, lenders are much more careful when it comes to doling out money to investors.
In order to determine whether or not you are a viable candidate, lenders will look at your total debt ratio, which is determined by your total monthly expenses divided by total monthly income from all sources, including rentals. But not all lenders recognize the full amount you expect to get from your rental unit. Say, for instance, you expect to receive $1,000 each month from your tenant, your lender, for security sake, may only consider 50% of that. Most lenders will permit you to have no more than 40% total debt ratio. If you want to get into the investment game, choose your lender wisely and be sure to lower your total debt ratio before applying for that second mortgage.