5 Crucial Things to Consider Before Buying an Investment Property

Buying an investment property is an exciting endeavor. You can provide a home for people or businesses and passively profit from doing so – who doesn’t want that?

But ask anyone at the final, profitable stage of owning one of these properties how they got there, and you’ll quickly learn that successful investment property ownership starts well before making a purchase. 

To help your investment be as profitable as possible while reducing your stress, here are the 5 most important things to consider before buying an investment property.

Your checklist of things to consider before buying an investment property

1. The type of property

For most people, adding an additional revenue stream and earning a profit is the goal of buying an investment property. 

With that, there are details to consider such as the type of property you want to invest in and the type of tenants you are looking to rent to.

There are many residential property types that you can consider, and each will attract different types of tenants:

• Detached single-family home
• Townhome
• Duplex/triplex/quadruplex
• Condominium/loft
• Apartment Building
• Co-living space
• Student housing
• Affordable housing
• Mixed-Use Building

Most of the time, your budget will determine the type of property you can afford. Many first-time property investors find that condos are the best fit for their budget and their experience level, while seasoned investors will look for properties that have the potential to be subdivided.

One strategy would be to have a rough idea of they type of renter you would like to rent to (e.g. families or students) and work backwards from there, allowing that to guide the type of property to purchase.

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2. The cost and economics of your property 

This goes without saying, but one of the the top of things to consider before buying an investment property is the general economics of owning and operating a rental.

Let’s begin addressing the property’s costs.

Assuming you’re taking out a mortgage, you’ll need enough for a down payment which starts at 20% for non-owner occupied investment properties in Canada. You’ll also need a good credit score to qualify in the first place. 

Beyond this, other costs you’ll need to budget for include:

Closing costs:

• legal fees
• land transfer tax
• title search fees
• title insurance
• appraisal fee
• survey fee
• home inspection fee

*Experts estimate that buyers should budget an additional 3-5% of the property’s purchase price for closing costs.

General home ownership costs:

• renovations
• mortgage payments
• property taxes
• home insurance

Tenant turnover costs:

• turnover repairs and maintenance
• potential vacancy costs
• cost of listing, marketing, and leasing

Operating costs:

• repairs and maintenance
• emergency funds
• any other costs relevant to your property, such as utilities
• property manager fees

In order to avoid operating at a negative, your monthly rental revenue must be more than your monthly mortgage payments. As a general rule, the monthly rent should be no less than 1% of the purchase price.

That said, if your monthly rental revenue exceeds your monthly mortgage payments and all other associated costs (repairs, maintenance, utilities, etc.), then you’ve done your proper due diligence.

3. Where your property is located

Closely related to the topic of an income property’s economics is the unit’s location. Look for investment property areas that will help you meet your tenant goals (and your revenue goals). 

This requires you to take a closer look at the interested area (and surrounding areas) and consider factors like population fluctuations, neighborhood amenities and general desirability, income levels, local laws, transit score, crime index, and other factors that would affect your ability to sign qualified tenants at the price you intend to charge for rent – based on the rental property’s economics addressed in the previous section.

One important thing to research is the type of renter that would choose to live in particular neighborhoods and what their willingness (or ability) to pay for monthly rent would be. For example, if you want to rent to young and single professionals, they will gravitate towards areas full of amenities like fitness gyms, restaurants, coffee shops, and bars. Post secondary students will search for rentals in proximity to their school. Families will look for areas with good schools and parks.

If you have concerns about not being in proximity to a region that achieves good economics for you, a possible workaround is hiring a property manager.

To give you an idea of where the rental demand is headed in Canada, here are the cities with the largest year-over-year growth:

1. London, ON ended the year with the largest year-over-year rent price growth rate for one-bedrooms in the nation, up 32%.

2. Halifax, NS one-bedroom rent had the second fastest growth rent since this time last year, climbing 27.4%.
3. Calgary, AB followed closely behind Halifax with one-bedroom rent jumping 27.1%.

4. Kingston, ON saw one-bedroom rent rocket up 26.9%, making it the 4th fastest-growing.

If you’re able to purchase a reasonably priced rental property in any of these areas, you can take comfort in knowing that renter demand will be stronger.

4. What's required to maintain your property

Maintaining your own property can save you hefty property manager fees and can teach you a lot about the process (especially if it’s your first time owning an investment property).

That said, if you live far from your investment property, aren’t a handy person, have another busy full-time job, or generally don’t have the capacity to be on-call 24/7, you’ll likely need to hire someone to manage it for you. The average property management fee in Canada is 6-10% of the gross monthly rent. Some may charge add-on fees for additional services such as tenant placement, leasing, or other services.

While this option will cost you more, it will hand off much of the work and stress of managing your investment property, including finding qualified tenants, collecting rent, and taking care of any maintenance matters that arise. Take a deeper dive into your maintenance obligations as a landlord.

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Plus, if you’re planning on buying an investment property in an unfamiliar location, working with a property management company will take care of all of the necessary contractors and navigate local property laws for you.

5. The risk of owning and managing your own property

As lucrative as buying investment properties can be, doing the ground work of informing yourself and laying down a process will help you achieve long-term success. This is especially true if you’re figuring out how to be a first-time landlord.

Here’s just a brief look at all of the moving pieces that must come together in order for your rental to be a worthwhile investment:

• securing a mortgage
• affording mortgage payments
• planning and keeping to a budget
• brushing up on the local landlord and tenant laws
• finding and signing reliable tenants
• managing ongoing maintenance and repairs
• maintaining tenant relations
• handling and paying for unexpected emergencies
• overcoming market dips 

Knowing the important things to consider before buying an investment property will certainly help get you started on the right foot.

Fortunately, here to help you with the most important of these pieces – securing reliable tenants – is Rhenti’s automated lead-to-lease software.

Rhenti has helped thousands of landlords, property managers, agents, and leasing professionals across Canada streamline their leasing operations, reducing their workload by a factor of 4-6X on average.

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