Rental properties: 8 things to know before becoming a landlord
Posted on Sep 18, 2013 in Mortgage Market Updates and NewsBy Jasmine Miller
Rental properties are an excellent investment but they can be a lot of work. Here's what you need to know.
Converting your basement into an apartment can be a lucrative move, no question, but there are perks and perils to using part of your home as a rental property. Here are eight things to keep in mind before taking the plunge.
1 Rental properties: Do it legally, or don't do it.
Just because you have space for a renter doesn't mean you're allowed to get one. Some municipalities don't issue permits for secondary suites. If you build one anyway (there's always a contractor out there who will do work without permits), and you're discovered, you can be forced to pay fines and even dismantle the rental property. “We've heard of situations where disgruntled neighbours inform the city of illegal units next to them," says Rebecca Isenberg, sales representative at Sutton Sadie Moranis Realty Brokerage in Toronto. She and her business partner, Helene Katz, broker of record at the same agency, have 35 years combined experience and have helped scores of homeowners become landlords.
Besides zoning issues, "a prospective landlord must verify that a second unit meets the requirements of the fire code," says Rebecca. For example, are there two exits, and is the ceiling high enough? If something goes wrong—a fire, for example—in an illegal dwelling, the landlord is on the hook. “If your insurance company isn't aware of the second dwelling, they may not pay your claim, if you make one. They certainly will not cover the tenant's possessions, and you might have a lawsuit from your tenants," says Helene.
If you've got permits for the space, there's no need to be anxious about notifying your insurance provider. "Your premium might increase, and any new tenant will still be required to purchase their own insurance package in order for the landlord to be fully, legally, covered," says Helene. It's just a phone call, and it could save you a lot of headache.
2 You probably won't pocket the entire rent—it's taxable and there are expenses.
You'll need to issue a receipt to your tenants for the rent they pay on their rental property, and they may use it to claim a deduction on their income tax. Even if they don't, you're expected to declare the rent as income and pay tax on it accordingly.
Tax aside, landlords face other expenses. On average, plan to spend the equivalent of a couple months rent every year on home maintenance and upkeep of the rental property (painting and cleaning services when tenants move out, appliance repairs, and fixture upgrades or replacement).
3 The space you have might not attract the tenants you want.
Especially if you share common areas like a driveway, foyer or yard, you want to be extra careful about who you get in there. To preserve your family's privacy, your rental property might need more than drywall and a new shower stall. "A tenant in a fourplex we're familiar with was exposed to all kinds of noises from their neighbours directly above. They could even hear them sneeze," says Rebecca. "Some sound-proofing would have helped that situation."
Make sure your electrical service can accommodate more people (you might have to upgrade from 100 amps to 200); consider a larger water tank so the tenant won't knock on your door because they can't shower when you do laundry.
Don't spend lavishly on decor, but make sure the apartment is one you would want to live in—that way you're more likely to land a tenant you want to live with. Landlord Beige might not work in your home, but it's a good choice for a rental space. A subdued colour lets your tenant imagine their own life in the space and is one less thing for them to ask you to contend with before moving in. Remember: like prospective homebuyers, prospective renters often try to negotiate the rent and extras, like new paint.
4 Once they're in, it's hard to get tenants out.
Rules vary across the country, but all renters are protected by provincial legislation and governing bodies, and the requirements for eviction are high for good reason: No one should feel their home could easily be taken away. "As a landlord, you should be knowledgeable of the Residential Tenancies Act," says Helene. "Tenants are very knowledgeable of their rights under this act."
Also, tenants can leave before a lease is up (usually by giving two months’ notice), so you want to ask questions to determine that they're staying a while. Why? The longer you keep a tenant, the cheaper it is for you in the long run: when tenants move out, you need to show the space, get repairs done and wait for the next appropriate candidate. This can take weeks during which you won't be collecting rent.
Remember, too, that you can't protect yourself from all risk. You can—and should—ask for first and last month's rent when your tenants move in, but a security deposit to cover holes in walls, broken appliances or ruined hardwood, is not allowed in some provinces. Familiarize yourself with the rules in your area or you could unwittingly break the law.
You should also know that not all clauses in a lease are binding. For example, if you write into the document that there are to be no pets or children in your building, and your tenant agrees by signing, but later gets a four-legged companion or a bundle of joy anyway, you can't evict them.
It's not that you don't have any rights as a landlord—if the dog is a menace to your safety, you can go to the overseeing agency in your jurisdiction and make an application for eviction, but it won't be granted simply because there is a pet in the house. (And you're just stuck with the baby; tenants can't be evicted for reproducing.)
5 Showing your space and finding the right tenants is tough work.
A prospective landlord, especially a first-timer, should consider the services of a realtor.
You'll pay her the equivalent of a month's rent, but the agent will assess your space to determine a realistic price; she can draft a listings write-up and post it on realtor.ca and MLS, which is accessed by tens of thousands of real estate professionals, many with clients who'd like to see your space. "We'll screen all the inquiries about your apartment and the applications," says Rebecca. "That means credit checks, getting an employment letter and contacting prior landlords to see if there is a history of NSF cheques, too."
If you decide not to use a realtor, be prepared to do that rigorous investigating on your own. And since time is money, you should factor that legwork into your balance sheet.
6 A rental unit won't necessarily add to the value of your home.
Some home renovations are almost always worth the investment: an updated kitchen or bathroom, for example, or new paint and floors. But some aren't: swimming pools or saunas, usually. So if you love and use them, go ahead and install them for your own enjoyment, but don't think of them as an investment. Same goes for a rental unit.
If you do construction without permits, future owners of your home will have to contend with that. If they can't rent the space out, or don't want the risk since it's not legal, they'll have an extra kitchen that's of no use to them and space that's probably not easily integrated into a single-family home. They might use that as a negotiating tool to get your asking price down.
7 Landlords should be handy.
You don't need to be able to re-wire your home, but if you can't deal with a blown fuse or a clogged toilet, if standing on a ladder or bending under a sink freaks you out, you could have problems.
Here's why: if tenants confront even a small a problem (a leaky faucet, say, or a light that won't go on), they don't have to solve it, they just have to call the landlord. If you can't handle the work yourself, you need to find someone who can.
Before there's a problem, ideally before your apartment is rented, interview contractors who will take on small jobs (they're tough to find). Explain that you'll have tenants and the potential problems that could arise based on the condition of your home—plumbing issues, electrical shorts, aging radiators—and that you're looking for someone who could do that work quickly if needed. Keep their numbers on hand and don't make tenants wait long after making a complaint to fix problems. But the more you learn to do yourself, the more money you'll keep for yourself.
If you're buying new appliances, pay for the extended warranties. It's one thing to manage your own space and problems, but add someone else's washing machine to the mix and it can get to be too much. Extended warranties, besides being a tax write-off against rental income, mean fewer headaches for you.
8 Being a landlord isn't a lottery win—it's a part-time job.
But work can be rewarding, so if you do it right, it can pay off—and not just with the extra cash (although that's the main reason, let's be honest). "We know a landlord and tenant who babysit each other’s pets and plants when either one travels," says Rebecca. "Finding the right tenant is key, and as realtors, that's our goal."
3 worthy resources for prospective landlords
Check out the Provincial and Territorial Fact Sheet for rental authorities in your province, covering guidelines for eviction, as well as rights and responsibilities of landlords and tenants.
2 Landlord's Self Help Centre
Membership allows you to access copies of rental applications and tenancy agreement forms.
3 Rent Check Credit Bureau
If you're not using a realtor, you may need to pay to access the information you need on prospective tenants. This is a good place to start.