Investment properties: What to watch out for

There are many advantages to buying an investment property in today’s market. This column will explore some of the things you need to be aware of when purchasing that rental condominium or house.

EXTRA CASH ON CLOSING

When renting a residential property from the get-go you are not entitled to the ‘New Home Buyers Rebate’ from the government at the time of closing. You will need to front the money and collect the rebate back as part of your income tax filings.

YOU BECOME A LANDLORD

As soon as your property is rented you are a landlord and must comply with the Residential Tenancies Act, 2006. There are several rules and regulations you’ll have to follow and familiarize yourself with, including but not limited to, the form of the lease, eviction processes, and a landlord’s obligations for maintenance. You will also have to deal with tenant issues and concerns on an ongoing basis. While hiring a property manager may alleviate some of these issues, their salary becomes an additional cost.

EXTRA COSTS

The investment is not limited to your down payment. Rental units often require more maintenance and repairs than an average home and repairs may be needed on an emergency basis. It’s important to set aside money for home improvements and repairs, future vacancies, and taxes.

As an example here are some things you need to be prepared to pay for:

• a) Carrying the mortgage and all expenses if you have no tenant or if the tenant you have stops paying rent;
• b) The condition of the property (i.e. hot water tank or broken stove replacement), projected vacancies and rates of tenant turnover;
• c) Commercial insurance.

You may also incur extra fees when purchasing the property. If you are a first-time homebuyer and counting on the Land Transfer Tax rebate for example, then you must occupy the home as your principal residence within nine months of the date of transfer in order to qualify. With a new construction rental property you will also be responsible to pay HST on the property upfront and apply for a rebate from the Canada Revenue Agency yourself, rather than have the builder take care of it. This adds significant upfront costs to the purchase of a rental property.

CRACKDOWN ON SHORT-TERM RENTALS

The recent influx in investment properties offered as short-term rentals such as Airbnb, VRBO, etc. has sparked much debate as to what will be allowed and it depends on the municipality where the property is located. As a result, there is a lot of inconsistency. Mississauga is one of the most agreeable GTA municipalities when it comes to short-term rentals, however, Toronto, Markham and Oakville have all taken stricter approaches.

One of Toronto’s most important regulations is the requirement that a short-term rental be a principal residence. This is significant because it prohibits a person from purchasing a property with the intent that it be used for short-term rentals year-round. There are also a number of other cost prohibitive regulations including licencing and registration requirements and a 4 per cent Municipal Accommodation Tax on all rentals for a period of less than 28 consecutive days.

While these pitfalls are important to be aware of, with proper planning and the help of your real estate lawyer and other professionals, a rental property can be a fantastic investment. At the end of the day you are left with an appreciating capital asset where someone else is paying off your mortgage. What a great retirement plan!

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