Looking to expand your real-estate portfolio? Perhaps you have a primary residence on which you’re slowly but surely paying down the mortgage, and suddenly, you’ve found yourself with more savings than you anticipated. Purchasing a multi-unit dwelling to stuff with tenants could theoretically pad your pockets on a monthly basis for as long as you decide to hold onto it. Right now, interest rates are relatively low and rents are high, so investors are acquiring income properties like never before. The process is not as easy as finding an okay house and cramming it with naïve university students, though. Here are a few (very important) financial and administrative points to consider:
The down payment: First and foremost, you must recognize that under the Canada Mortgage and Housing Corporation guidelines, updated last year, ownership of any second property—regardless of whether you define it as an investment property or not—requires a minimum down payment of 20 per cent. You can put down as little as five per cent on your primary residence, so be mindful of that difference. Your lawyer or accountant might advise you to put the home in your partner’s name to try and get away with a lower down payment (which is technically legal), but in most cases, you should account for the extra funds when considering a second pad.
Money for multi-unit dwellings: Further to the previous point, any building containing five or more units will not only require a 30 to 35 per cent down payment, but it might also mean you’ll have to pay commercial interest rates, as many lenders view these properties as higher-risk. If you used the typical 3.49 per cent fixed residential rate in your budget calculations, you might want to up that to the commercial rate of 5.49 per cent, then run your numbers again. This change could make or break your decision to invest. Four units (or fewer) is the magic number here—this is the cutoff for the 20 per cent down payment and residential 3.49 per cent estimate.
The legality of basement apartments: Based on my experience, I’d speculate that more than half of all the basement units in Toronto freehold homes are not legal. A legal apartment requires the homeowner to work with the Toronto Building office, Municipal Licensing & Standards, Toronto Fire Services, and the electrical service authority to bring the property up to code before any tenants move in. Many landlords skip these regulatory hurdles and just start renting their basements to students—or anyone who’s clean and makes little noise. This illegal setup will still generate income for you, but could become a burden down the line when the authorities show up with fines, work orders, or, worse still, a notice to vacate.
Respect for tax collectors: If you plan on being a legit landlord and a true real-estate investor, you should be declaring any rental income on your T4 and paying tax on it. (Most don’t, which is super illegal.) Hire an accountant—especially if you plan to purchase multiple properties—and talk to your lawyer about applying for an Ontario business number. This will allow you to claim rental income as a corporate earning and pay a bit less around tax time.
Playing (and paying for) the long game: If you’re interested in a regular monthly income stream (similar to a dividend-paying stock), you should be anticipating a minimum 10-year ownership period on your income property. Ask any successful real-estate investor and they’ll tell you that the assumption is that you are keeping this place forever. Yes, there are costs associated with any asset, and homes are no different: You’ll pay land-transfer taxes and legal fees on the purchase, and still more realtor, legal, and mortgage discharge fees when the sale is finalized. Adopt a long-term outlook, allowing for your monthly payments from tenants and how the property will appreciate in value over time.
For prospective income-property buyers, owning a one-bedroom condo and taking on a six-unit apartment complex are two entirely different animals, but the goal in purchasing the former is that, one day, you’ll be equipped to buy (and make money off of) the latter. My advice is to start slow and start small. Above all, make sure you keep enough money socked away for any unforeseen expenses. With these points in mind, future landlord, you’ll be able to withstand the many ups and downs of the market cycle.