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Five key considerations when buying a second home as a rental property

Are you thinking about buying a second home as a rental property? Maybe you’re looking for ways to generate additional income now or maybe you’re looking for an income stream for your future retirement. Whatever your reasons, investing in a second property to rent out is a little different from buying a home to live in.
Here are five key things to consider when buying a second home as a rental property.

#1. Location
While location is an important factor in all real estate purchases, it’s even more important when you’re thinking about becoming a landlord. A rental home’s location influences many things, including:

  • the demographic of your tenants – i.e. students, seniors, immigrants, young families

  • the demand – is it a “hot” area near schools, community centres, and public transportation?

  • the rent itself – what is the going market rate in the area?

  • your ability to manage the property – tough when you live in a different city

If home prices in areas that command the highest rent are out of your price range, look online to research property prices in an “up-and-coming” area. For example, MoneySense Magazine recently published its “Top Cities to Buy Real Estate 2018” list. Brantford, Ontario took the top spot. It has a low average home purchase price of $505,016 and a healthy average five-year rent increase of 20.27%.

#2. Financial Matters
Learn about the key matters of financing a rental property. First of all, lenders require a down payment of at least 20 percent. Yet there are also some attractive tax advantages for owners of rental homes. Tax deductions include:

  • Interest on rental mortgage

  • Utility bills (if utilities are included in rent)

  • Property taxes

  • Home insurance

  • Property management fees

  • Costs of renovations or repairs

Depending on the situation, a portion of your rental income may be used to calculate your income as part of your mortgage application, an important point because you’ll have the additional expenses listed above to deal with. Talk to a Meridian Mortgage Specialist for more information.

#3. Property Management
Many people purchasing second home to rent out don’t want the responsibility of day-to-day maintenance and dealing with tenants. If this sounds familiar, consider hiring a property manager.
Property management companies will conduct move-in and move-out inspections, collect your rents, and take emergency calls from tenants. Rates are usually based on the location and rental income of the property.

#4. Tenanted Property or Not
Buying a tenant-occupied rental property has pros and cons. On one hand, you avoid the time and effort of finding new tenants. On the other hand, according to the Residential Tenancies Act, if you purchase a tenanted property where the tenant has a lease, you must honour the terms of the lease until it expires – including the tenant’s right to renew the lease. This can be an issue if you plan to carry out any major renovations or repairs that require a building permit, because Ontario laws require rental properties to be vacant prior to completing this work.

#5. Cost of Renovations/Repairs
Are you planning to buy a fixer upper to rent out? If so, make sure you include the repair or renovation costs in your budget before putting in an offer – as you would if you were buying a home to live in. And keep in mind that since the property must be vacated to complete projects that require a building permit, you won’t collect rent during the renovations.
Buying a second home as a rental property can make good financial sense if you’re looking for a steady income stream. Yet it’s important to understand the various factors that may impact your success at becoming a landlord before you sign an Offer to Purchase.
Speak to a Meridian Mortgage Specialist for more information.